There have been significant IRS developments and court cases that affect transfer pricing. This article will highlight those changes for the United States and internationally including Mexico, Canada and other countries.

United States

IRS Developments
IRS to require reporting of uncertain tax positions

As if FIN 48 weren’t bad enough, IRS Announcement 2010-9 revealed its intent to require certain large taxpayers to provide information regarding their uncertain tax positions. Reporting would be mandatory for companies that have had to adopt the provisions of ASC 740-10, more commonly known as FIN48.

Intercompany financial/loan guarantees
At a presentation to the American Bar Association Section on Taxation, Steven Musher, IRS Association chief counsel (International), indicated the IRS is focused on reducing ambiguity regarding financial guarantees. He cited three areas being addressed: 1) a guarantee transaction compensable under the arm’s-length standard 2) appropriate compensation for such transactions 3) methods for valuing the compensation. Some believe this interest in guarantees is related to the recent decision in the Canadian Tax Courts relative to General Electric Capital Corporation (see summary below).

Court Decisions
Xilinx v. Commissioner

The US Court of Appeals withdrew both the opinion and dissent issued on May 27, 2009, in the case of Xilinx v. Commissioner in January 2010. The original opinion in the case drew a great deal of criticism, as it concluded all costs should be included in a cost sharing agreement and was at odds with the arm’s-length standard. We’ll wait and see what happens next.

Veritas Software v. Commissioner

The U.S. Tax Court found mostly in favor of Veritas and made special note that the IRS’s findings/position was arbitrary, capricious and unreasonable. The IRS indicated a buy-in price for a cost sharing agreement at $2.5 billion (subsequently reduced to $1.675 billion), versus the Veritas buy-in calculation of $166 million. Veritas had used a CUT method to calculate the value of the buy-in by its foreign subsidiary.


Non-U.S. Tax Jurisdictions

In December 2009, the Australian Tax Office (ATO) issued a “practice statement” addressing interest on intercompany loans. Until finalized, it appears the ATO is using a “rule of thumb” concept, referred to as “notching,” to determine if an intercompany interest rate meets the arm’s-length standard. Notching assumes the subsidiary has the same credit rating as the parent company. Stay tuned for future updates when the issue is finalized by the ATO.


In December 2009, the Mexican tax authorities issued a Miscellaneous Tax Resolution. This resolution clarified independence rules stating that an independent CPA firm could provide both audit and tax advisory services and comply with The Mexican Regulations of the Federal Tax Code (RFTC) Article 67.

RFTC Article 67 stated, in summary, that when a CPA provides tax consulting services to a taxpayer, that firm cannot audit the company’s statutory financial statements, reports on sale of shares or reports relating to a refund of value added tax. These independence rules created controversy and potential problems for large and mid-sized accounting firms which provided a bundle of services.


Effective January 2010, the Hungary taxing authority has adopted the European Union’s approach to transfer pricing documentation, including the use of “Master File” standardized documentation format. This permits the use of a standard description of the business, transactions and transfer pricing policies which are then supplemented with country, and transaction-specific information for each taxing authority. In certain circumstances, the Master File approach can reduce transfer pricing compliance costs.

Hong Kong

In December 2009, Hong Kong’s Inland Revenue Department issued Departmental Interpretation and Practice Note No. 46, Transfer Pricing Guidelines—Methodologies and Related Issues (DIPN 46). DIPN 46 outlines a framework for implementation of comprehensive transfer pricing regulations to come and will generally follow the OECD Guidelines.

Court Decision


The Tax Court of Canada, in General Electric Capital Canada Inc. v. The Queen, vacated an assessment by the Canada Revenue Agency regarding the payment of fees to its U.S. parent company, General Electric Capital Corporation. In its decision, the court upheld GE Canada’s appeal, finding that in these circumstances, there was more than sufficient economic value in the guarantee to justify the fee charged during the years under review. This doesn’t completely resolve the issue of subsidiaries paying fees to its parent for guaranteeing the debt of a subsidiary, but it does move in a positive direction toward recognizing that without parent company guarantees, the subsidiaries would have paid higher interest rates than if they had been otherwise able to obtain financing.