Transfer Pricing Times: Volume X, Issue 10

Inside this Edition: The Advantages and Potential Pitfalls of Adopting Transfer Pricing Safe Harbors in the U.S. 

In June 2012, the OECD Council released the interim discussion draft Section E on Safe Harbors (“Section E”)1 in Chapter IV of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”). On May 16 of this year, the OECD Council approved the revised Section E to reflect public comments and further discussions held within the OECD. Many practitioners, taxpayers, and tax authorities, including the IRS, had provided detailed commentary on the proposed Section E. While the U.S. transfer pricing regulations already include certain unilateral safe harbors, the OECD Council is recommending the broader adoption of multi-lateral safe harbors among member countries.2 The following summary provides an overview of some of the primary advantages of incorporating additional safe harbors into the U.S. regulations as well as some of the potential pitfalls.

Compliance with global transfer pricing documentation requirements has become ever more onerous for taxpayers as an increasing number of countries have adopted unique rules. Tax authorities, practitioners, and taxpayers believe that incorporating bilateral (or multilateral) safe harbors into U.S. and other transfer pricing regulations could simplify compliance efforts, reduce compliance costs, and improve certainty for taxpayers with less complex intercompany transactions (e.g., routine transfers of tangible property). In addition, the hope is that implementing bilateral or multilateral safe harbors will improve the IRS’ ability to effectively and efficiently audit routine transfer pricing issues by (1) improving compliance rates among taxpayers; (2) allowing the IRS to allocate its already limited resources to reviewing more complex transactions; and, (3) reducing the amount of time and effort the IRS and its treaty partners spend negotiating routine transfer pricing issues.

With that said, the IRS and other tax authorities have voiced concern that the adoption of safe harbors may not, in fact, reduce their administrative burden if significant effort is required to “police” the use of those safe harbors and ensure that taxpayers are appropriately applying them. In response, various stakeholders (including the IRS) have suggested the inclusion of “eligibility criteria” in any safe harbor legislation. Some of the proposed eligibility criteria include the following:

  • Requiring a multi-year commitment from taxpayers that elect to apply safe harbors to combat the potential for adverse selection, ensuring that potential tax cost savings realized in one year will likely be offset throughout the economic cycle;
  • Limiting the application of the safe harbors based on transaction size and/or type of transaction (e.g., routine distribution, low-risk manufacturing, contract R&D, etc.); and,
  • Clearly defining the profit level indicators and benchmarks that would be deemed acceptable when applying a multilateral safe harbor, and specifying the items that should be included in an operating income computation (e.g., specifications on the inclusion/exclusion of certain revenue and cost items).

If appropriate mechanisms can be effectively incorporated into safe harbor legislation, then the adoption of multilateral safe harbors is likely to provide significant benefits to both taxpayers and tax authorities that outweigh any potential pitfalls that may arise as a result of such legislation. Implementation of safe harbors for routine transactions could be a significant step forward in the IRS’ effort to streamline transfer pricing audits. Appropriate safe harbors would allow auditors to focus their efforts on more complex transfer pricing matters, while at the same time allowing taxpayers to benefit from added security and reduced compliance costs related to analyzing and documenting routine transfer pricing issues. This would in turn free up resources to focus on more complex, high-value intercompany transactions.

Multistate Tax Commission Considering Joint Transfer Pricing Audit Program
Over the past year, the Multistate Tax Commission (“MTC”) has been considering the launch of a joint transfer pricing audit program that would give member U.S. states access to more resources to pursue transfer pricing adjustments under Section 482. The MTC currently conducts joint corporate income, sales and use, franchise, and gross receipts tax audits for its member states and is now studying the costs of hiring additional staff dedicated to work solely on transfer pricing issues.

Many states do not have the resources available to hire employees to work exclusively on transfer pricing issues, something the potential MTC program could address. Under a joint audit program, participating states would share the costs of the MTC’s team and have an alternative to using contract auditors to perform complex analyses of intercompany transactions. This alternative could be especially appealing to states in light of recent controversies involving contract auditors, such as Chainbridge Software LLP, which has been criticized for its methods of transfer pricing analysis.

Joe Huddleston, executive director of the MTC, recently told Bloomberg BNA that the program would likely need the participation of at least six states to be economically viable. The states that likely have the most to gain from a joint audit program are smaller, separate-filing states. Transfer pricing is generally more of an issue for separate-filing states, where each individual company that is located within the state and that has related party relationships files its own separate tax return, regardless of whether or not the company is part of a related group structure. Therefore, if the MTC decides to implement the program, they will most likely reach out to separate-filing states first in order to secure enough partners to get the program off the ground.
In order to achieve the goal of more cost-efficient and effective transfer pricing audits at the state level, the MTC is aiming to have a concrete proposal put together in time for the MTC’s Executive Committee meeting in December 2013. Due to the scope and size of the personnel needs of a specialized joint audit program such as this, it could take at least a year or two to implement once it is approved by the MTC. However, if the program eventually proves to be practical and beneficial, it could drive more transfer pricing cases at the state level.

Update: Further Clarification Released Concerning Treatment of Intercompany Loans in Brazil
Brazil has seen several key changes to its transfer pricing regime over the past year. Federal Law 12.715/12 and Federal Law 12.766/12 (the “Law(s)”), published in September and December 2012, respectively, significantly modified existing Brazilian transfer pricing regulations (see ). Under Federal Law 12.766/12, loan agreements under which interest is paid by a Brazilian taxpayer to a related party must comply with transfer pricing rules, regardless of whether or not such loans are registered with the Brazilian Central Bank.4 However, given that there was no specific guidance issued with the initial Law 12.766/2012 regarding the pricing of related-party loans, there was subsequently much confusion and difficulty in implementing the new Law. As a result, the Brazilian Ministry of Finance released Ruling 427/2013 (the “Ruling”) on August 2, 2013, clarifying the methods to be applied.

For transactions that occur on or following January 1, 2013, the interest due to / from the Brazilian entity should be calculated based on a specified reference rate plus a spread as determined by the Brazilian Minister of Finance. The appropriate reference rate largely depends on the currency in which the loan is denominated (e.g., USD- or Reais-denominated Brazilian sovereign debt yields, or the relevant Libor rate for other currencies), based on the market average for the period under review.

The Ruling also sets forth the following annual spreads, depending on the taxpayer’s position on the loan:

  • Brazilian entity is the borrower: The statutory spread should be no more than 3.5 percent.
  • Brazilian entity is the lender: The spread is required to be no less than 2.5 percent.

Note that the actual spreads used could deviate from these guidelines, but the tax treatment will not. For example, if a Brazilian borrower pays interest at a spread greater than 3.5 percent, its interest cost above that level cannot be deducted for tax purposes.
In addition, due to the lack of specific guidance until August, the Ruling allows the spread applicable to intercompany financial transactions in which the Brazilian entity is the lender to be zero for the period spanning January 1, 2013 through August 2, 2013.

Cash Pooling and Transfer Pricing
Cash pools, in which multinationals make optimal use of internal funds for their financing needs, are gaining in popularity (particularly among companies operating in the Euro zone). Consequently, the transfer pricing issues inherent in such arrangements are drawing increased scrutiny from tax authorities (including at the state level within the US. A recent article by Duff & Phelps transfer pricing professionals discusses the primary transfer pricing challenges of cross-border cash pooling arrangements, including the optimal allocation among cash pool members of the resulting benefits. This article, published in Treasury & Risk, can be viewed here.


1.For more information on Section E, please see Duff & Phelps Transfer Pricing Times, Volume X, Issue 6 or review the OECD publication at
2.On March 15, 2013, the IRS requested public comments on bilateral safe harbors related to routine distribution transactions. Certain US treaty partners have expressed some preliminary interest in this type of safe harbor.
3.The Multistate Tax Commission is an intergovernmental state tax agency working on behalf of states and taxpayers to administer tax laws that apply to multistate and multinational enterprises. For more information on the MTC and its member states, visit
4.Prior to this Law, interest paid on intercompany financial transactions registered with the Brazilian Central Bank was considered outside of the scope of the Brazilian transfer pricing regulations.


Transfer Pricing Times: Volume X, Issue 10 2013-10-22T00:00:00.0000000 /insights/publications/transfer-pricing/transfer-pricing-times-volume-x-issue-10 publication {B062D54C-1425-4A04-8F9F-95EA14068E6D} {2746A2DD-363F-4E48-8914-B4F0BDEA669C} {4C8AF8F6-BAEC-4E94-ACC7-7AC0F36685FC} {E010DCD9-B7BA-4B98-9F3C-A51506B5C1D8} {95D7F66C-11BB-4E7D-B07C-48874A321F98}

Related Services

Duff & Phelps Valuation Advisory Services

Valuation Advisory

Valuation and consulting for financial reporting, federal, state and local tax, investment and risk management purposes.

Valuation Advisory
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Tax Services

Property tax, site selection, transfer pricing, sales and use tax and unclaimed property advisory.

Tax Services
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Transfer Pricing

Comprehensive transfer pricing advisory covering compliance, planning, controversy and implementation.

Transfer Pricing
Duff & Phelps Valuation Advisory Services

Valuation Advisory

Valuation Services

Objective valuations for financial reporting, tax and management planning purposes.

Valuation Services

Case Studies