Saturday, January 2, 2021
Stephen L. Curtis (Cross Border Analytics), Facebook, the IRS, and the Commensurate With Income Standard, 169 Tax Notes Fed. 1921 (Dec. 21, 2020):
In ongoing transfer pricing litigation, Facebook is challenging the IRS’s adjustment of a buy-in payment under a cost-sharing arrangement (CSA) with an Irish affiliate. The IRS stated that the adjustment was necessary to ensure compliance with the commensurate with income (CWI) standard added to section 482 by the Tax Reform Act of 1986. It is unclear, however, whether the IRS has performed a reg. section 1.482-7(i)(6) periodic adjustment calculation in this case — either before issuing its initial proposed adjustment in 2016 or before its more recently revised adjustment in October 2019.
Applying forensic economic investigation, this report demonstrates that the CWI tool provided by the regulations is relevant to this case and supported by the facts. Using available information, the analysis yields an indicative periodic adjustment calculation that appears to better measure Facebook’s compliance with transfer pricing laws than the IRS’s current approach under reg. section 1.482-7(g). The results suggest that it may be in Facebook’s interest to accept the IRS’s proposed adjustment, and conversely, that it may be in the IRS’s best interest to withdraw that adjustment and instead perform a periodic adjustment to one or more recent open tax years. That can be known definitively only if a periodic adjustment test is performed using complete information.