Worldwide transfer pricing reference guide 2014

United States (continued)
Transfer pricing penalties
Pursuant to IRC §6662, taxpayers may be liable for either a 20% or 40% penalty for an underpayment of tax attributable to a substantial
or gross valuation misstatement, respectively. The penalties are calculated as a percentage of the underpayment, or the penalty may
apply to a valuation misstatement. There is no penalty for failure to have documentation; however, documentation may help avoid
penalty.
Penalty relief
Penalties may be avoided by establishing reasonable cause and good faith by preparing documentation of the taxpayer’s application of
IRC§482 as described below.
Documentation requirements
Transfer pricing documentation is not required by law. However, in practice, it is recommended that taxpayers maintain
contemporaneous documentation in order to avoid the penalties described above. The existence of documentation need not be either
disclosed in, or provided with, the return.
For penalty avoidance purposes, a taxpayer is considered to have satisfied the documentation requirement if it maintained certain
documentation (further described below) that substantiates the taxpayer’s assertion that it reasonably concluded that, given the
available data and the applicable pricing methods, the method (and its application) provided the most reliable measure of an arm’s length
result under the principles of the best method rule.
The principal documents required by the regulations are:
• An overview of the taxpayer’s business and an analysis of the legal and economic factors affecting pricing
• A description of the organizational structure
• Any documents explicitly required by regulations (e.g., CSA documents)
• A description of the pricing method and reasons why the method was selected (a best method analysis)
• A description of alternative methods and why they were not selected
• A description of controlled transactions and any internal data used to analyze them
• A description of comparables used, how comparability was evaluated and any adjustments that were made
• An explanation of any economic analysis and any projections used to develop the pricing method
• Any material data discovered after the close of the tax year but before filing the tax return
• A general index of the principal and background documents and a description of the recordkeeping system
Documentation deadlines
If documentation is prepared to help protect against penalties, then it must be in place by the filing date of a timely filed US tax return.
Taxpayers must provide documentation to the IRS within 30 days of an examiner’s request.
Statute of limitations on transfer pricing assessments
A general statute of limitations applies in the US, which is three years from the later of either the tax return due date or the date the return
was actually filed. The statute is extended to six years for substantial understatements of income. There is no statute of limitations for fraudrelated
adjustments.
Most treaties with trading partners provide the IRS access to closed years in order to provide relief from double taxation pursuant to a
mutual agreement procedure.
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