Academic journal article Journal of Accountancy

Proposed Transfer Pricing Penalty Amendment

Academic journal article Journal of Accountancy

Proposed Transfer Pricing Penalty Amendment

Article excerpt

A revenue proposal released by the Treasury Department on April 30 amends penalty provisions for substantial and gross valuation misstatements relating to transfer pricing adjustments under tax code section 482. The amendment reduces and more clearly defines the threshold for imposing penalties. Under current law, a 20% penalty for substantial valuation misstatements is imposed if one of two tests is met:

1. The net transfer price adjustment exceeds $10 million.

2. The tax return transfer price is at least two times (or not more than half) of the redetermined price.

The penalty increases to 40% for a gross valuation misstatement, which applies if the net transfer price adjustment exceeds $20 million or the tax return transfer price is at least four times (or not more than one-fourth) of the redetermined price.

For the $10 million (and $20 million) threshold, certain adjustments are excluded from the net transfer price adjustment primarily those resulting from a transfer price that a taxpayer used in good faith and with reasonable cause. Under proposed Treasury regulations issued in January, the good faith and reasonable cause exception generally depends on whether the taxpayer adequately documented its transfer pricing method. …

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