Editing Transfer pricing (section)

==U.S. specific tax rules==
U.S. transfer pricing rules are lengthy.<ref>basic rules through 2001 [https://www.irs.gov/pub/irs-apa/482_regs.pdf 26 CFR 1.482-0 through -8] plus the cost sharing ([http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&&rgn=div8&view=text&node=26:6.0.1.1.1.0.8.188&idno=26 26 CFR 1.482-7]) and services ([http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&&rgn=div8&view=text&node=26:6.0.1.1.1.0.8.191&idno=26 26 CFR 1.482-9]) regulations together exceed 120,000 words.</ref>  They incorporate all of the principles above, using CPM (see below) instead of TNMM.  U.S. rules specifically provide that a taxpayer's intent to avoid or evade tax is not a prerequisite to adjustment by the [[Internal Revenue Service]], nor are [[nonrecognition provisions]].  The U.S. rules give no priority to any particular method of testing prices, requiring instead explicit analysis to determine the best method.  U.S. comparability standards limit use of adjustments for business strategies in testing prices to clearly defined market share strategies, but permit limited consideration of location savings.

===Comparable profits method===
The Comparable Profits method (CPM)<ref>[http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&&rgn=div8&view=text&node=26:6.0.1.1.1.0.8.186&idno=26 26 CFR 1.482-5].</ref> was introduced in the 1992 proposed regulations and has been a prominent feature of IRS transfer pricing practice since.  Under CPM, the tested party's overall results, rather than its transactions, are compared with the overall results of similarly situated enterprises for whom reliable data is available.  Comparisons are made for the profit level indicator that most reliably represents profitability for the type of business.  For example, a sales company's profitability may be most reliably measured as a return on sales (pre-tax profit as a percent of sales).

CPM inherently requires lower levels of comparability in the nature of the goods or services.  Further, data used for CPM generally can be readily obtained in the U.S. and many countries through public filings of comparable enterprises.

Results of the tested party or comparable enterprises may require adjustment to achieve comparability.  Such adjustments may include effective interest adjustments for customer financing or debt levels, inventory adjustments, etc.

===Cost plus and resale price issues===
U.S. rules apply resale price method and cost-plus with respect to goods strictly on a transactional basis.<ref>26 CFR 1.482-3(c)(2) and (d)(2).</ref>  Thus, comparable transactions must be found for all tested transactions in order to apply these methods.  Industry averages or statistical measures are not permitted.  Where a manufacturing entity provides contract manufacturing for both related and unrelated parties, it may readily have reliable data on comparable transactions.  However, absent such in-house comparables, it is often difficult to obtain reliable data for applying cost-plus.

The rules on services expand cost-plus, providing an additional option to mitigate these data problems.<ref>26 CFR 1.482-9(c)</ref>  Charges to related parties for services not in the primary business of either the tested party or the related party group are rebuttably presumed to be arm's length if priced at cost plus zero (the services cost method).  Such services may include back-room operations (e.g., accounting and data processing services for groups not engaged in providing such services to clients), product testing, or a variety of such non-integral services.  This method is not permitted for manufacturing, reselling, and certain other services that typically are integral to a business.

U.S. rules also specifically permit shared services agreements.<ref>26 CFR 1.482-9(c).</ref>  Under such agreements, various group members may perform services which benefit more than one member.  Prices charged are considered arm's length where the costs are allocated in a consistent manner among the members based on reasonably anticipated benefits.  For instance, shared services costs may be allocated among members based on a formula involving expected or actual sales or a combination of factors.

===Terms between parties===
Under U.S. rules, actual conduct of the parties is more important than contractual terms.  Where the conduct of the parties differs from terms of the contract, the IRS has authority to deem the actual terms to be those needed to permit the actual conduct.<ref name="cfr">26 CFR 1.482-.</ref>

===Adjustments===
U.S. rules require that the IRS may not adjust prices found to be within the arm's length range.<ref name="cfr" />  Where prices charged are outside that range, prices may be adjusted by the IRS unilaterally to the midpoint of the range.  The burden of proof that a transfer pricing adjustment by the IRS is incorrect is on the taxpayer unless the IRS adjustment is shown to be arbitrary and capricious.  However, the courts have generally required both taxpayers and the IRS to demonstrate their facts where agreement is not reached.

===Documentation and penalties===
If the IRS adjusts prices by more than $5 million or 10 percent of the taxpayer’s gross receipts, penalties apply.  The penalty is 20% of the amount of the tax adjustment, increased to 40% at a higher threshold.<ref>[https://www.law.cornell.edu/uscode/text/26/6662- 26 USC 6662] {{webarchive|url=https://web.archive.org/web/20100426064925/https://www.law.cornell.edu/uscode/text/26/6662- |date=2010-04-26 }}.</ref>

This penalty may be avoided only if the taxpayer maintains contemporaneous documentation meeting requirements in the regulations, and provides such documentation to the IRS within 30 days of IRS request.<ref>[http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:13.0.1.1.1.0.16.256&idno=26 26 CFR 1.6662-6(d)(2)(iii)].</ref>  If documentation is not provided at all, the IRS may make adjustments based on any information it has available.  Contemporaneous means the documentation existed with 30 days of filing the taxpayer's tax return.  Documentation requirements are quite specific, and generally require a best method analysis and detailed support for the pricing and methodology used for testing such pricing.  To qualify, the documentation must reasonably support the prices used in computing tax.

===Commensurate with income standard===
U.S. tax law requires that the foreign transferee/user of intangible property (patents, processes, trademarks, know-how, etc.) will be deemed to pay to a controlling transferor/developer a royalty commensurate with the income derived from using the intangible property.<ref>[https://www.law.cornell.edu/uscode/text/26/367- 26 USC 367(d)] and [http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:4.0.1.1.1.0.13.147&idno=26 26 CFR 1.367(d)-1T].</ref>  This applies whether such royalty is actually paid or not.  This requirement may result in [[withholding tax]] on deemed payments for use of intangible property in the U.S.