IRS Ramps Up Scrutiny on Low-Profit Inbound Distributors – Strategic Insight for LATAM Businesses Operating in the U.S.

The IRS has increased its focus on U.S. subsidiaries of foreign companies that operate as distributors and consistently report low profits or losses. Backed by Inflation Reduction Act funding, the IRS launched its “large foreign-owned corporations transfer pricing initiative”, issuing compliance letters that flagged taxpayers based on returns from 2017–2021.

Key points for Latin American businesses with operations in the U.S.:

• IRS requests for self-correction under Section 482, with potential exposure to penalties and adjustments.
• Heightened audit risks, even for smaller subsidiaries that may believe they are below the radar.
• Potential for double taxation, as only a few LATAM countries have tax treaties with the U.S. to mitigate this risk.

This development signals that LATAM entities must strengthen their transfer pricing documentation and compliance strategies when operating in the United States.