IRS Issues Transfer Pricing Regulations

Journal of Accountancy, April 1993 | Go to article overview

IRS Issues Transfer Pricing Regulations


In January 1993 the IRS released temporary and proposed regulations on intercompany pricing of tangible and intangible property under tax code section 482, along with related penalty provisions for substantial and gross valuation misstatements under sections 6662(e) and (h).

The temporary regulations, generally effective for taxable years beginning after April 21, were issued in response to criticism that proposed regulations released in January 1992 were too restrictive.

The new regulations' guiding principle is that transactions between related entities should have the same results as those between two unrelated entities dealing at arm's length. To that end, the regulations list various pricing methods that may be used.

Significantly, the strict priority of methods that previously was in effect has been replaced with a "best method" rule, which allows use of the method that provides the most accurate determination of an arm's-length result based on the relevant facts and circumstances. Gone is a requirement in the 1992 proposed regulations that results of certain methods (such as resale price, cost-plus and comparable adjustable transactions) fall within a range of profits of unrelated companies that are engaged in similar businesses (the "comparable profits interval").

In addition, the new regulations permit use of a range of prices (the "arm's-length range") derived by applying the same pricing method to two or more comparable transactions between unrelated parties. …

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