The Internal Revenue Service (IRS) governs transfer pricing regulations in the United States. The IRS has issued guidelines and regulations to ensure that multinational companies adhere to the arm’s length principle and comply with the regulations outlined in Internal Revenue Code (IRC) Section 482. IRC Section 482 provides the legal basis and authority for the IRS to allocate income, deductions, credits, or allowances among related entities to prevent tax evasion by multinational corporations.

The arm’s length principle is a fundamental concept in global transfer pricing that aims to ensure that related-party transactions are conducted under terms and conditions that would potentially exist between unrelated parties in the market. In other words, it directs that multinational corporations should set their transfer prices for transactions between related entities as if they were dealing with independent third parties. It is important to note that this principle applies to both parties in the transaction and, as a result, transfer pricing compliance should be evaluated in both tax jurisdictions.

It is a somewhat common misconception that transfer pricing concerns are limited to the prices charged on the sale or purchase of tangible goods between related parties. In actuality, it is important to maintain arm’s length transfer pricing for all material intercompany transactions, which may include:

  • Manufacture of tangible goods on behalf of a related party;
  • Distribution of tangible goods on behalf of a related party;
  • Provision of services, including sourcing/procurement, sales and marketing, research and development, engineering, logistics, or any back-office services provided on behalf of a related party;
  • Transfer or license of intellectual property; or
  • Financial transactions, such as intercompany lending, borrowing, or guarantees.

U.S. Transfer Pricing Documentation Requirements

The U.S. transfer pricing regulations apply to all taxpayers, including U.S. branches of foreign-owned companies. These regulations are mostly consistent with the methodologies outlined in the Organisation for Economic Co-operation and Development’s Transfer Pricing Guidelines for Multinational Companies (OECD Guidelines). For example, both the IRS and OECD Guidelines require the preparation of Country-by-Country Reporting for taxpayers with at least $850 million in revenue for the previous annual reporting period.[1] In the U.S., this information is provided in Form 8975, which is a schedule filed with the tax return and used to report a U.S. multinational group’s income, taxes paid, and other indicators of economic activity on a country-by-country basis.[2]

One important difference in the U.S. regulations is that the IRS does not require the Master File or Local File report concepts that are presented in the OECD Guidelines. In fact, preparation of annual transfer pricing documentation is not explicitly required in the U.S.[3] However, while annual documentation may not be required, there are other important factors to consider before determining whether or not to prepare U.S. transfer pricing documentation. Such factors may include, but are not limited to the following:

  1. Revenue or transaction volume thresholds: Companies should understand the Group revenue or intercompany transaction volume thresholds that apply in each country they operate;
  2. Transfer pricing audit history: Companies that have recently undergone transfer pricing audits in the U.S. and have received an adjustment by the IRS will likely be exposed to additional audit risk in the future;
  3. Recent acquisitions or new intercompany transactions: Having sufficient documentation in place as soon as possible serves to shift the burden of proof from the taxpayer to the IRS;
  4. Recent legal rulings or court decisions: Tax court cases can have a significant impact on transfer pricing regulations; and
  5. Penalties for non-compliance: IRC Section 6662(e)(3)(B) and Treas. Reg. Section 1.6662-6 outline the requirements for transfer pricing documentation and the corresponding penalties for adjustments determined by the IRS.

Failure to comply with transfer pricing regulations can lead to severe consequences for multinational corporations. The IRS may make adjustments to the taxpayer’s income, which may result in additional taxes, penalties, and interest. Penalties from an IRS adjustment vary depending on the nature and severity of the non-compliance, but can range from 20 percent to 40 percent of the underpayment determined by the IRS. In some cases, disputes may arise between the IRS and the taxpayer, leading to lengthy and costly litigation. In November 2022, Holly Paz, acting commissioner of the IRS Large Business and International division, expressed that the IRS would be working to change their approach to transfer pricing audits, with assertion of penalties being one of the priorities.[4]

Ultimately, the decision regarding whether or not to prepare annual transfer pricing documentation in the U.S. is company-specific. A corporation’s operations, transfer pricing structure, global revenue, transaction volume or complexity, the cost of documentation preparation, and individual risk appetite should all be considered in the determination. In addition, it is important to stay informed about recent transfer pricing developments or U.S. tax court decisions in transfer pricing cases as such decisions may impact transfer pricing regulations going forward.

Recent Developments

U.S. Tax Court Decision – 3M v. Commissioner

On February 9, 2023, and almost seven years after the case was first fully argued, the U.S. Tax Court released its decision on a transfer pricing case involving 3M, a U.S. industrial conglomerate. At a high-level, this case involved a royalty for the license of intellectual property paid by 3M’s subsidiary in Brazil to the U.S. entity. The Brazilian Patent and Trademark Office argued that the agreed royalty was too high and otherwise inconsistent with its local regulations. The IRS took the view that the royalty rate was too low in comparison with other intercompany licensing arrangements and levied a transfer pricing adjustment on 3M.

The issue is partially tied to the U.S. rules on “blocked income.” The blocked income rules found in the U.S. tax code[5] pertain to the treatment of income that a U.S. entity earns in a foreign country that cannot be transferred back to the U.S. because of foreign exchange controls or other restrictions imposed by the foreign country. There were two primary issues litigated in this case, however. The first was whether the IRS could use Section 482 to allocate additional royalty income to 3M. The second was whether Treas. Reg. Sec. 1.482-1(h)(2), which specifies when and how foreign legal restrictions will be considered for purposes of a Section 482 adjustment, was invalid.[6]

The U.S. Tax Court narrowly ruled in favor of the IRS in support of their ability to make such transfer pricing adjustments involving blocked income under Section 482. The case can be appealed, but has the potential to impact other transfer pricing cases in the future. For example, a decision in Coca-Cola’s current transfer pricing case[7] was put on hold until the results of the 3M case were delivered.

The OECD’s Two Pillar Plan for International Tax Reform

In October 2021, over 135 countries that make up the OECD’s Inclusive Framework preliminarily approved a two-pillar plan to reform international taxation rules. Pillar 1 of the plan deals with the allocation of taxing rights based on sales into a country and covers a more limited number of taxpayers (only companies with a global turnover above €20 billion and a profit margin above 10 percent). The Global Anti-Base Erosion (GloBE) rules under Pillar 2, however, seek to impose a 15 percent minimum tax on the earnings of multinational groups with revenues of at least €750 million.[8] It is easy to see how each of these items will have a significant impact on many international tax and transfer pricing rules and structures.

The U.S. has its own transfer pricing regulations and is not bound to the transfer pricing guidance dictated by the OECD Guidelines. However, under the Biden administration, the U.S. agreed to be included in the planning and implementation of the OECD’s initiative. The level of U.S. participation is yet to be decided, though it is anticipated that the U.S. will lose anywhere from $60 billion to $120 billion in tax revenue under the Pillar 2 minimum tax alone. As a result, U.S. involvement in the reform has become a significant bipartisan issue in the U.S. Congress and the U.S. presidential election in 2024 will likely impact how soon and to what extent the U.S. incorporates such tax reforms.

The rules under Pillar 2 will continue to evolve as the potential processes are worked out and more guidance is released by the OECD. In whatever manner these rules are implemented, it is clear that there will be significant changes to the global transfer pricing system resulting from these reforms. As the rules are finalized over the next few years, it will be important for all multinational corporations to review their current international tax and transfer pricing structure to ensure continued tax efficiency.


Even before the OECD initially released its two-pillared model, the global landscape of transfer pricing rules, regulations, and guidelines have been subject to complexity, subjective interpretation, and frequent changes as many countries have sought to bolster their taxable income through transfer pricing. With the looming implementation of Pillar 2, there will be significant changes for corporations in the U.S. and around the world.

To avoid penalties and potential disputes with tax authorities, multinational corporations should seek professional advice from transfer pricing advisors to ensure that their transfer pricing policies are well-documented, properly implemented, compliant with the arm’s length principle, and meet the regulatory requirements in the U.S. and other relevant jurisdictions. The U.S. and Japan have a long history of cooperation in the negotiation of advance pricing agreements (APAs). A bilateral APA is an agreement between tax authorities on a multinational corporations transfer pricing structures and policies, which can help mitigate specific transfer pricing risks and uncertainties.


For more information, contact:

Jay Hudson


[email protected]


[1] The OECD Guidelines have defined a threshold of at least €750 million.

[2] https://www.irs.gov/businesses/international-businesses/us-multinational-enterprises

[3] Upon receiving a request from the IRS, a U.S. taxpayer has thirty days to provide comprehensive transfer pricing documentation.

[4] Sponheimer, Brendan, Christine Kim, and David Brotz; “United States: IRS Signals Increased Assertion of the Economic Substance Doctrine and Related Penalties in Transfer Pricing Cases;” Global Compliance News; February 2023

[5] IRC Section 1.964-2

[6] Wrappe, Steven, and Samit Shah. “Tax Court transfer pricing case has big implications;” February 24, 2023.

[7] T.C. 31183-15

[8] Sites, David, and Cory Perry. “Planning considerations as Pillar 2 implementation begins”; May 23, 2023.