Academic journal article Journal of Accountancy

Regulations Clarify Penalty Provisions for Transfer Pricing Valuation Adjustments

Academic journal article Journal of Accountancy

Regulations Clarify Penalty Provisions for Transfer Pricing Valuation Adjustments

Article excerpt

The Internal Revenue Service released temporary regulations clarifying section 6662 penalty provisions for section 482 transfer pricing adjustments. The regulations replace regulations proposed in January 1993 and reflect amendments made by the Omnibus Budget Reconciliation Act of 1993.

Section 6662 imposes a penalty of either 20% or 40% of the additional tax resulting from either substantial or gross valuation misstatements, respectively. The penalty can apply to specific transactions or to net transfer price adjustments for a given year.

The 20% penalty for substantial valuation misstatements applies to net transfer pricing adjustments exceeding the lesser of $5 million or 10% of gross receipts. Similarly, the 40% penalty for gross valuation misstatements applies to adjustments that exceed the lesser of $20 million or 20% of gross receipts.

Taxpayers subject to transfer pricing adjustments may avoid these penalties by maintaining certain contemporaneous documents and providing them to the IRS within 30 days of a request. The documents must establish that the taxpayer used a reasonable transfer pricing method specified under the section 482 regulations or that another method that clearly reflected income was used because none of the specified methods would clearly reflect income.

The temporary regulations provide four nonexclusive factors to be considered in deciding whether a taxpayer's determination of the most accurate transfer pricing method was reasonable: (1) the taxpayer's experience and knowledge, (2) the extent to which accurate data were available and analyzed by the taxpayer (given the relative cost of collecting the data), (3) the extent to which the taxpayer correctly applied the method and (4) the extent to which the taxpayer relied on a qualified professional. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.