November 29, 2022

Transfer Pricing Update 2022

Transfer Pricing Update 2022 Year-End Tax Guide

In 2022, as in 2021, transfer pricing was top of mind for tax professionals. This year in particular, global supply chain reconfiguration and digital transformation put pressure on transfer pricing, increasing the risk of tax controversy. Simultaneously, rising inflation around the world is introducing additional challenges and straining an already distressed global supply chain. Adapting to these new circumstances requires leaders to re-evaluate and update commonly used models and embrace new technologies and ways of doing business.

The various challenges preventing a global economic re-emergence from the pandemic era — not just inflation but also rising oil prices and heightened global political risks — are making practitioners reconsider existing transfer pricing models and potential adjustments to factor in economic distortions or shocks.

Transfer pricing remains a top tax concern for multinational entities (MNEs), not only because it can result in multimillion-dollar adjustments but also because of its complexity. In 2022, the Internal Revenue Service (IRS) received funding to hire approximately 87,000 new IRS agents to support its review and enforcement objectives.

According to Organisation for Economic Co-operation and Development (OECD) statistics, transfer pricing disputes represent a main portion of the disputes among treaty members (up to 6.478 in 2020 from 3.328 in 2010). Transfer pricing audits are rising all over the world. Transparency tools such as the country-by-country report (CbyCR), adopted for several countries since 2016, have contributed to this trend.

OECD Base Erosion and Profit Shifting (BEPS) initiatives continue to dominate international tax discussions. Almost 10 years after the initiative was introduced, the proposed recommendations have been broadly adopted by member and non-member countries. Transfer pricing is a substantive part of the 15 action plans within the BEPS initiative, which has spearheaded new thought leadership in the areas of hard-to-value intangibles and financial transactions.

The OECD is currently working on a second package, commonly referred to as BEPS 2.0. This second phase finalizes a two-pillar agreement to continue addressing challenges that arise from digitalization of the global economy. Pillar one (Pillar I) establishes new nexus and profit allocation rules for large multinational enterprises meeting certain revenue and profitability thresholds. Pillar two (Pillar II) establishes mechanisms to ensure large multinationals pay a minimum 15% tax.

There are ongoing discussions about how the new alternative minimum tax (AMT) just enacted by the Biden Administration and effective for tax years beginning after December 31, 2022, will affect international tax measures introduced by the Tax Cuts and Jobs Act 2017 (TCJA), specifically Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) also aimed at counteracting tax avoidance. The consensus is that the tax treatment of international transactions will be affected directly and indirectly as a consequence of these changes.

While large MNEs tend to focus on transfer pricing, middle-market entities (MMEs) often overlook transfer pricing as a tool for planning. Given the projected lackluster economic growth in the U.S. and abroad, governments are refocusing efforts on reviews and enforcement in the face of significant declines in tax revenue.

2022 Marcum Year-End Tax Guide

Transfer Pricing Under the Biden Administration’s Inflation Reduction Act

In August 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the Act), which addresses climate change, healthcare, inflation and taxes. The Act applies a 15% minimum tax on corporations with over $1 billion in revenue, a 1% excise tax on corporate share buybacks and about $80 billion of additional funding over 10 years for the Internal Revenue Service (IRS). Changes introduced will apply to taxable years beginning after 2022.

The corporate AMT, equal to the excess of 15% of a corporation’s adjusted financial statement income (AFSI) over its corporate AMT foreign tax credit, will apply to C-corporations which, for a period of three taxable years, have an average annual AFSI greater than $1 billion. There are limited exceptions to this rule and a special rule applicable to foreign-parented multinational groups.1

Half of the additional $80 billion in funding for the IRS is expected to be dedicated to compliance enforcement, specifically focusing on MNEs’ transfer pricing activity. Internal sources at the IRS confirmed that additional resources would be used to expand the capabilities of the Large Business and International division (LB&I) to bring advanced data analysis technology to enhance and accelerate their risk assessment process. As a result, transfer pricing audits are expected to rise significantly.

Relevant Economic Trends

More than two years after the onset of the pandemic, the U.S. and global economies still struggle to realize the gains promised when the world began to reopen in mid-2021. After an initial spike in economic activity, buoyed by low interest rates, significant inflationary pressures arose. Some inflationary factors were foreseen, such as the U.S. Federal Reserve’s continued policy of quantitative easing and three rounds of stimulus checks to taxpayers. Other factors were not anticipated, such as Russia’s invasion of Ukraine and the subsequent stress on the oil market. Inflationary pressures were realized in 2022, with the inflation rate remaining at 8%. The combination of persistently high inflation rates, anemic supply chains and greater political risks to cross-border activities will continue to impact MNEs in the short-to-medium term. As such, it is imperative that intercompany pricing strategies consider macroeconomic as well as industry-specific factors, where applicable.

Special Expenses and Related Transfer Pricing Adjustments

Some businesses thrived during the COVID-19 pandemic, while others reported losses on income statements. While the IRS has not officially released guidance on how to adjust transfer pricing in response to COVID-19, the OECD — of which the U.S. is a member — published guidance on December 18, 2020.

In its COVID guidance, the OECD advised that when performing a comparability analysis for FY 2020 or FY 2021, it may be appropriate to include loss-making comparables. These loss-making comparables should not be rejected simply because of losses incurred during the COVID-affected periods.

A best practice when performing a comparability analysis that includes COVID-affected periods is to use a five-year (as opposed to three-year) weighted average rate of profitability to smooth the effects of the pandemic period on company performance.

During the pandemic, many multinationals were unable to operate at optimal capacity due to major shifts in operations (e.g., government-imposed restrictions on workforce capacity, social distancing measures, etc.). As a result, multinationals’ workforces shrunk significantly, their capacities were underutilized, and revenues declined.

These challenges have raised a number of questions. For example, in regard to overall business risks, which entity should bear the costs or losses caused by the COVID-19 pandemic? In principle, the entity responsible for carrying out activities that ensure employee productivity (and that carries the associated risks) should bear the costs and/or losses that arose from this operational risk. On the other hand, since market risk primarily relates to sales and marketing functions, the entity performing these functions and bearing such risks should be liable for losses caused by the decline in demand.

Industry Spotlight: The Cryptocurrency Industry

The COVID-19 pandemic was a once-in-a-lifetime global event and capital markets, including the cryptocurrency (crypto) market, continue to feel its effects. The market capitalization (market cap) of the total crypto industry crossed $1 trillion during the 2020-2021 bull run as the Federal Reserve’s rapid infusion of liquidity created ripe conditions for crypto to gain capital, popularity, and serious investment consideration from institutional investors.

Crypto Currency

The crypto market is an emerging asset class, market incumbents and new entrants alike are still discovering the nuances. Two significant sectors within this industry are crypto miners and crypto exchanges. Crypto miners are individuals or companies that engage in the activities needed to create new coins. This can be a profitable venture but requires sizable investment and extreme considerations for energy prices, government restrictions, and the ongoing volatility of the crypto market. Crypto exchanges have a bit of a cleaner line of sight to profitability. Trading volume surged exponentially starting in 2020, and the best exchanges took advantage of this surge in retail activity.

Global restrictions regarding resources and laws prompted companies to set up multinational business structures, where one business will have multiple MNEs. MNEs interact with each other, thus creating transfer pricing implications. For example, a mining company incorporated in Switzerland may set up a related party entity in the U.S. to perform the mining operations with cheaper energy and space. Such an arrangement would necessitate optimizing intercompany arrangements and ensuring compliance with transfer pricing regulations.

The crypto market capitalization is projected to grow in the medium and long term, recuperating losses incurred during the 2022 period. Stay tuned for that market’s ultimate results.


Brazil’s Adoption of the OECD Standard

In April 2022 Brazil announced full adoption of the international transfer pricing standard dictated by the OECD, embracing the arm’s length standard as well as comparability analysis, transfer pricing methods, special considerations for intangible and financial transactions, and other technical aspects.

Conversations between Brazil’s country representative and the OECD started back in 2019, but further discussions and decisions were postponed during the pandemic. Any possibility of the adoption of a hybrid transfer pricing system has been discarded, but it is expected that there will be some variations to the new set of rules to adjust for the economic realities specific to Brazil. For instance, there may be certain adjustments pertaining to evaluating commodities given that this sector represents a significant portion of Brazil’s economy.

Alignment of the legacy transfer pricing rules and OECD standards is expected to be ongoing through 2023, with no specific timeline for completion.

Mexico’s APA Program No Longer Available for Maquilas

Beginning in 2022, maquiladoras companies (maquilas), or low-cost factories in Mexico owned by foreign corporations, can no longer sign an advance pricing agreement (APA) with the Mexican Tax Authority.

The possibility of relying on the use of APAs to resolve transfer pricing issues involving maquilas has been eliminated and replaced by a sort of safe harbor calculation to assess adequate arm’s length standards for this type of entity.

Latest Updates From the OECD

The OECD continues to play a relevant role in the international tax arena not only by providing transfer pricing technical guidance, which is followed by member and non-member states, but also by leading efforts to transform the international tax system to adapt to the new business circumstances driven by the digitalization of the economy.

In 2015, after a lot of initial skepticism, the OECD launched the final version of the BEPS 15 actions package. The focus of this initiative was to address the tax challenges arising from the digitalization of the economy. It does so by tackling tax avoidance, improving coherence of international tax rules, and promoting a more transparent tax environment. Specifically, Action 13 introduced a three-tiered approach for transfer pricing documentation, including the preparation of a CbyCR, a master file, and a local file. The CbyCR, which discloses aggregate data on the global allocation of income, profit, taxes paid, and economic activity among tax jurisdictions in which MNEs operate, can be shared with tax administrations for use in high-level transfer pricing and BEPS risk assessments.

Today, over 135 countries and jurisdictions collaborate to implement the BEPS package, while 100 countries and jurisdictions have joined the Multilateral Instrument on BEPS.

Updated Guidance on Implementation of CbyCR Reporting

The adoption of CbyCR alongside other transfer pricing documentation measures has been unprecedented. By 2016, 58 jurisdictions had implemented the CbyCR, and by 2022 that number was over 100. The adoption of this higher standard of transfer pricing documentation by less developed economies has increased the compliance burden on MNEs while increasing the possibility of more audit activity by the taxing authorities, since MNEs are supposed to be more transparent about their operational schemes.

In 2016, the U.S. adopted the CbyCR by requiring MNEs with U.S. parent and global revenues over $850 million to complete Form 8975. The U.S. does not require MNEs to prepare a master file or local file because existing transfer pricing documentation requests taxpayers to prepare equivalent information.

In October 2022, the OECD issued additional guidance on the implementation of CbyCR. The report aims to help tax administrations and taxpayers interpret the standard and achieve consistent implementation.

2022 Version of OECD Guidelines

In January 2022, an updated version of the OECD guidelines was released to the public. It includes further guidance applying the Residual Profit Split method; a revised version of Chapter VI: Intangibles; a new chapter addressing Chapter X financial transactions; and general consistency updates throughout the document.

New Head of OECD Tax Policy and Administration

Pascal Saint-Amans, the enthusiastic leader of the OECD BEPS actions plan, has retired from the organization and Grace Perez- Navarro has been appointed as his replacement. Many are wondering if the change in leadership will slow down the OECD’s work on international tax matters.


The OECD BEPS 2.0 two-pillar package, aimed at combating BEPS, has made great advances since it was first announced in 2019. Pillar I proposes a new taxing right with respect to the digital economy, which could allocate a percentage of MNEs’ residual profits to end users or customers’ jurisdictions where the company may not have a traditional taxing presence. Meanwhile, Pillar II proposes a minimum global corporate tax to MNEs with profits in each country or jurisdiction that are subject to an effective tax rate lower than the minimum rate. In that case, those profits will be taxed at a minimum rate of 15%.

A much smaller group of MNEs will be subject to application under Pillar I than under Pillar II. The Pillar I in-scope threshold considers MNEs with global turnover above EUR 20 billion and profitability above 10%, which covers about 100 of the largest and most profitable MNEs. Extractive and financial corporations are excluded. After seven years of application, the turnover threshold will reduce to EUR10 billion. On the other hand, Pillar II or GloBE rules will apply to MNEs meeting the EUR 750 million threshold, which is consistent with the CbyCR’s threshold. Initially both Pillar I and II initiatives were to be adopted concurrently. However in practice the adoption of Pillar II is significantly ahead of Pillar I. Both initiatives have extremely ambitious implementation timelines: Pillar II in 2023 and Pillar I in 2024. Since they were launched the OECD has released more than one dozen documents, including blueprints, statements, commentaries, and public consultations on both pillars.

Some consensus around a faster adoption of Pillar II has emerged. In December 2021 the OECD published model legislation for including GloBE rules in local legislation. Days later, the EU published a draft directive with the same purpose. International tax experts believe the key features for the implementation of the GloBE are set; nevertheless, a lot more work is needed to define important administrative aspects for its application.

How these measures will impact U.S. MNEs is currently a matter of extensive discussion. The treatment of existent GILTI tax under GloBE rules is a key element to assess the practical consequences.

Within Pillar I, Amount A determination has made more progress than Amount B.

Controversy Updates

In recent years, a new trend has emerged with respect to the U.S. Tax Court (Tax Court) decisions on transfer pricing cases. Contrary to prior years, the Tax Court is finding that IRS transfer pricing adjustments are right more often than not.

Since our last writing, two major transfer pricing controversy cases have reached major milestones: Altera Corp. v. Commissioner and Coca-Cola v. Commissioner.

The U.S. Supreme Court declined to hear Altera’s appeal of the Ninth Circuit’s decision in Altera v. Commissioner. The Ninth Circuit upheld the rule under Treasury Reg Section 1.482-7(A)(d)(2), which requires the inclusion of stock-based compensation in the calculation of intangible development costs for cost-sharing arrangements. The Supreme Court’s denial was Altera’s last point of appeal in the case. Issues may still be presented in future court cases.

In Coca-Cola v. Commissioner, the Tax Court ruled in November 2020 in favor of the IRS, which resulted in an additional $3.3 billion USD tax liability for Coca-Cola. The case centered on the ownership of marketing intangibles, which Coca-Cola claimed were partially owned by its foreign affiliates known as “supply points.” The tax court opinion relied on the lack of support in the intercompany agreements for the allocation of intangible property rights, and the observation that Coca-Cola could not indefinitely rely on a closing agreement with the IRS from a 1996 audit to provide certainty on its transfer pricing methods. In addition, the Tax Court showed surprising support for the application of the comparable profits method for intangible property transactions.

In October 2022, in the case Medtronic v. Commissioner, Memo 2022-85 August 2022, the Tax Court issued an opinion on using the transfer pricing method to determine income from intercompany licenses for intangible property required to manufacture certain medical devices and leads2. In this third opinion by the Tax Court, both taxpayer and IRS approaches to determine an arm’s length royalty rate for the intercompany transaction under review were rejected, instead an unspecified method was considered to be the most appropriate. Either this case see further litigation upon appeal by the parties or it establishes itself as precedent, the important take away is that transfer pricing is subject to increasing scrutiny by tax authority, especially when it involves intangibles; and, litigation can turn into an end-less battle.

Action Steps

While all these recent changes in the tax environment introduce new complexity to transfer pricing, they also create international tax and transfer pricing planning opportunities. Now is the time for large MNEs, as well as small and mid-sized MNEs, to take a fresh look at their transfer pricing policies — not only to defend their current transfer pricing position caused by the pandemic but also to identify new opportunities to further maximize deductibility and reduce global effective tax rates.

Marcum offers a full range of assurance, tax, and advisory services to clients operating businesses abroad who seek financing in the U.S. markets. From international business structuring to complex tax and transfer pricing matters, our professionals bring the Marcum standard of best-in-class service and a depth of knowledge to the international arena.

Marcum’s International Tax Services group provides a broad range of international tax services to both domestic and foreign clients that have global operations. Our international tax team has extensive experience in tax planning, cross border transactions and international tax compliance. Likewise, Marcum’s International Tax Services Group has the technical knowledge and experiences to assist in transfer pricing support for clients, including planning, preparation of documentation to confirm with IRS and OECD requirements, and assistance in defending tax return positions in the event of a tax audit.

2022 Marcum Year-End Tax Guide


  1. A corporation member of a foreign-parented international financial reporting group, will be applicable for the AMT if: (a) the three-year average AFSI Test is met for one or more taxable years which are prior to the current taxable year and end after December 31, 2021, and (b) taking into consideration the AFSI of all U.S. members of the group, U.S. trades or businesses of foreign group members and foreign subsidiaries of U.S. members, the three-year average AFSI Test is met for one or more taxable years which are prior to the current taxable year and end after December 31, 2021, applying a greater than $100 million threshold instead of $1 billion.
  2. Facts of this case include a license agreement between Medtronic Inc. and its Puerto Rico subsidiary for the right to manufacture, develop and commercialize intangibles related to medical devices and leads.