The IRS Large Business and International (LB&I) division has publicly released a practice unit—“Inbound resale price method routine distributor.”
This practice unit (release date 18 March 2016) is next item in a series of IRS examiner “job aides” and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions. Text of the practice unit is available on the IRS practice unit webpage.
The practice unit sets forth that the resale price method (RPM)—a specified transfer pricing method under Reg. section 1.482-3(c)—is used to evaluate whether a transfer price charged in a controlled transaction is arm’s length by comparing the gross profit margin realized in a controlled transaction to gross profit margins observed in uncontrolled transactions. RPM is ordinarily used in cases involving subsidiaries that are wholesale or resale distributors.
RPM may be used in conjunction with internal comparables or external comparables; however, the practice unit explains that RPM is a less direct method than the uncontrolled price method (CUP) method, but a more direct method than the comparable profits method (CPM). The more direct a method is, the stricter the comparability requirements. If the stricter comparability requirements are satisfied, then a more direct method will generally be more reliable than a less direct method.
The LB&I practice unit continues to explain that the use of the RPM may be inappropriate in instances when the comparables are better suited for the CPM because they do not meet the comparability requirements under RPM—for instance, when external comparables are employed. While the approach and underlying principles are the same when analyzing internal and external comparables, this LB&I practice unit focuses on external comparables.
The IRS practice units identify areas of strategic importance to the IRS, provide insight as to how IRS examiners will approach various transactions, and generally provide an understanding of the context in which an IRS examiner will approach a particular issue or transaction. \
Thus, taxpayers (and their tax advisers) facing an IRS examination or concerned with issue(s) presented by these practice units will want to review the relevant practice units, so as to have a better understanding of the issues that may arise either prior to or during an examination. For instance, the IRS practice units typically provide information that can help taxpayers:
For taxpayers selected for a pending IRS examination, the practice units can provide information that may assist with preparation for the examination. For taxpayers actually under examination, the practice units may provide information that can assist taxpayers respond to IRS requests.
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