The following three prerequisites must be found in order to apply IRC 482:
1) There must be two or more organizations, trades or businesses;
2) There must be common ownership or control, either directly or indirectly of such entities;
3) The IRS must determine that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of those entities.
The table summarizes the current transfer pricing documentation obligations.
Country by Country Report | |
Applicable | Yes. According to Treas. Reg. §1.6038-4 And consistent with Annex III to Chapter V of the OECD Transfer Pricing Guidelines. |
Filling Requirements | U.S. ultimate parent entity of a multinational group must file Form 8975 and corresponding Schedule A alongside its tax return. |
Due Date | For C corporations by the 15th day of the fourth month following the close of its tax year (April 15th for calendar year taxpayers). An additional six-month extension can be obtained (October 15th for calendar year taxpayers). |
Threshold | USD 850 million of prior year group’s consolidated revenue. |
Notifications | No |
Master File | |
Applicable | No |
Local File / Transfer Pricing (TP) Documentation | |
Applicable | Yes. TP Documentation that meets Section 6662(e) requirements may reduce or eliminate penalties. 1. An overview of the taxpayer’s business; 2. A description of the taxpayer’s organizational structure; 3. Any documentation explicitly required by Treas. Reg. §1.482-1 through 1.482-9; 4. A description of the method selected and an explanation of why that method was selected; 5. A description of the alternative methods that were considered and an explanation of why they were not selected; 6. A description of the controlled transactions; 7. A description of the comparables that were used; 8. An explanation of the economic analysis and projections relied upon in developing the method; 9. A description or summary of any relevant data that the taxpayer obtains after the end of the tax year and before filing a tax return; and, 10. A general index of the principal and background documents. |
Threshold | No |
Submission | No. Documentation requirements are voluntary but necessary to ensure penalty protection. |
Submission / Preparation Date | Tax return filling date. For penalty protection, documentation must be in existence when the tax return is filed. |
Timing Requirement to Tax Authority | 30 days upon request. |
Penalties | Yes |
Yes. There are penalties for inaccurate transfer pricing as specified in Section 6662 that can be assessed as an additional 20 percent or 40 percent of the tax underpayment:
Despite no penalties are directly associated with failure to submit transfer pricing documentation, preparing an adequate transfer pricing study that meets Section 6662(e) is the best strategy in case of an examination or audit by the tax authority.
According to the IRS “Transfer pricing reports that comprehensively document the reasonable selection and application of a transfer pricing method, consistent with the requirements of Section 6662(e), help demonstrate low levels of compliance risk and in turn help support early deselection of the transfer pricing issue from further examination. High-quality transfer pricing documentation allows the examining agent to rely on the taxpayer’s analysis of functions, risks, intangibles, value drivers, etc., saving both the taxpayer and the IRS time examining low-risk transfer pricing issues. Thus, robust transfer pricing documentation facilitates more efficient transfer pricing risk assessments and examinations for both taxpayers and examiners”.
The current US federal corporate tax rate is 21%, established by the Tax Cuts and Jobs Act (TCJA) of 2017. This rate applies to both U.S. corporations and the income of foreign corporations effectively connected with a U.S. trade or business. Some foreign corporations engaged in U.S. trade may be exempt from U.S. tax on effectively connected income due to a tax treaty.
The following table summarizes the U.S. corporate income tax main features.
Tax Type | Rate (%) |
Corporate Income Tax | 21 (1) |
Corporate Capital Gains Tax | 21 |
Branch Tax | 21 (1) |
Withholding Tax | (2) |
– Dividends | 30 (3) |
– Interest | 30 (3) (4) |
– Royalties from Patents, Know-how, etc. | 30 (3) |
– Branch Remittance Tax | 30 (5) |
Net Operating Losses (Years) | |
– Carryback | 0 (6) |
– Carryforward | Unlimited (6) |
(1) The 21% rate is effective for tax years beginning after 31 December 2017. In addition, many states levy income or capital-based taxes. A base erosion minimum tax is also imposed on corporations. See Section B.
(2) Rates may be reduced by treaty.
(3) Applicable to payments to non-US corporations and nonresidents.
(4) Interest on certain “portfolio debt” obligations issued after 18 July 1984 and non-effectively connected bank deposit interest are exempt from withholding tax.
(5) This is the branch profits tax applicable to non-US corporations.
(6) A net operating loss deduction is generally limited to 80% of taxable income. Special rules apply to certain types of losses and entities.
Yes, many states and localities levy their own corporate income taxes on top of the federal rate. These vary significantly by state. The following table summarizes other significant taxes:
Nature of Tax | Rate (%) | Notes |
Personal Holding Company (PHC) Tax | 20 | Applies to corporations satisfying a passive-income test. Imposed in addition to regular tax. Targets undistributed income. |
Accumulated Earnings Tax | 20 | Penalty tax on corporations (excluding PHCs) accumulating profits to avoid shareholder-level personal income tax. Assessed on accumulated taxable income exceeding a calculated amount. |
State and Local Income Taxes | Various | Imposed by most states and some local governments. |
State and Local Sales Taxes | Various | Imposed by many states and some local governments. |
Payroll Taxes | Federal unemployment insurance (FUTA): 6.0% on first $7,000 of wages (assuming full credit of 5.4%). Workmen’s compensation insurance rates vary by state and nature of employees’ activities. | |
Social Security Contributions (including Medicare tax) | Imposed on wages up to $160,200 (for 2023). – Paid by employer (6.2%) and employee (6.2%). – Medicare tax on all covered wages (for 2023): Paid by employer (1.45%) and employee (1.45%). |
Additional Resources
Disclaimer:
This FAQ is intended for informational purposes only and should not be construed as tax advice.
Please consult with a qualified tax professional for specific guidance.
Altus Economics, Inc. provides economic consulting services throughout the United States, and can now assist clients in other countries with the formation of the Altus Alliance global network of transfer pricing specialists.
