Yes, I can provide an example of a presentation of a company's intercompany transactions that would be a helpful summary for examiners to use in risk assessment.
Example of Intercompany Transactions Summary
Overview
This summary provides a high-level overview of the intercompany transactions within XYZ Corporation for the fiscal year 2023. The purpose of this summary is to facilitate the IRS's review and assessment of the transfer pricing documentation, focusing on the most significant transactions to streamline the audit process.
1. Intercompany Sales of Tangible Goods
- Parties Involved: XYZ Manufacturing (U.S.) and XYZ Distribution (Germany)
- Transaction Description: Sale of electronic components from XYZ Manufacturing to XYZ Distribution.
- Transaction Value: $50 million
- Transfer Pricing Method: Comparable Uncontrolled Price (CUP) Method
- Key Terms: Payment terms are net 30 days; FOB shipping point.
- Economic Analysis: The CUP method was selected based on comparable sales to third-party customers in the same industry. The prices charged to XYZ Distribution are consistent with those charged to unrelated parties.
2. Intercompany Services
- Parties Involved: XYZ Services (U.S.) and XYZ Marketing (UK)
- Transaction Description: Provision of marketing and administrative services by XYZ Services to XYZ Marketing.
- Transaction Value: $10 million
- Transfer Pricing Method: Cost Plus Method
- Key Terms: Services include market research, advertising, and administrative support. The markup on costs is 10%.
- Economic Analysis: The Cost Plus Method was selected due to the availability of internal cost data and the nature of the services provided. The markup is consistent with industry standards for similar services.
3. Intercompany Royalties
- Parties Involved: XYZ IP Holdings (Ireland) and XYZ Manufacturing (U.S.)
- Transaction Description: Payment of royalties for the use of patented technology.
- Transaction Value: $5 million
- Transfer Pricing Method: Comparable Uncontrolled Transaction (CUT) Method
- Key Terms: Royalty rate is 5% of net sales.
- Economic Analysis: The CUT method was selected based on comparable royalty agreements between unrelated parties. The royalty rate is within the range observed in third-party agreements.
4. Intercompany Loans
- Parties Involved: XYZ Finance (U.S.) and XYZ Operations (Brazil)
- Transaction Description: Provision of a loan from XYZ Finance to XYZ Operations.
- Transaction Value: $20 million
- Transfer Pricing Method: Comparable Uncontrolled Price (CUP) Method
- Key Terms: Interest rate is 4%, with a 5-year term.
- Economic Analysis: The interest rate was determined using the CUP method, based on comparable loans between unrelated parties. The rate is consistent with market rates for similar loans.
5. Cost Sharing Arrangement (CSA)
- Parties Involved: XYZ R&D (U.S.) and XYZ Innovations (India)
- Transaction Description: Cost sharing arrangement for the development of new software.
- Transaction Value: $15 million
- Transfer Pricing Method: Residual Profit Split Method
- Key Terms: Costs are shared based on the relative expected benefits. XYZ R&D contributes 60%, and XYZ Innovations contributes 40%.
- Economic Analysis: The Residual Profit Split Method was selected due to the unique and valuable intangibles involved. The allocation of costs is based on the expected benefits derived from the developed software.
Conclusion
This summary provides a snapshot of the key intercompany transactions within XYZ Corporation. Each transaction has been analyzed and documented in accordance with the arm's length principle as required by IRC Section 482 and the applicable Treasury Regulations. The transfer pricing methods selected are consistent with the nature of the transactions and the availability of comparable data.
This presentation aims to assist IRS examiners in understanding the scope and nature of XYZ Corporation's intercompany transactions, thereby facilitating a more efficient and focused audit process.
Sources:
IRM Part 4. Examining Process. Chapter 61. International Examination Guidelines. Section 3. Development of IRC 482 Cases
Publication 5300 (9/2020)
IRM Part 4. Examining Process. Chapter 11. Examining Officers Guide (EOG). Section 5. Allocation of Income and Deductions Under IRC 482
On the Exceptional Importance of Intercompany Agreements That Can Be Readily Produced
Estimating U.S. Corporate Income Tax Lost to Tax Planning
CCA 201726012
