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INTRODUCTION

This article addresses major developments in transfer pricing practice that will affect the way advice is given to clients and their ability to implement such advice. Over the past 15 months, the I.R.S. and the O.E.C.D. separately published transfer pricing audit and administrative initiatives that will significantly impact the way controlled transactions among related parties are reported. These initiatives are consistent with overall concerns raised in the Base Erosion and Profit Shifting (“B.E.P.S.”) Report of the O.E.C.D. Each stands independently of B.E.P.S. and will likely be unaffected by the ultimate actions plans implementing B.E.P.S. goals.

U.S DEVELOPMENTS - OVERVIEW

Congress has not passed any significant transfer pricing legislation in recent years, and U.S. transfer pricing regulations remain essentially unchanged. As a result, the U.S. “best method” rule of transfer pricing remains the norm. That method entails an analysis of functions and risks borne by each party engaged in the controlled transaction with particular focus on (i) the relative business risk borne by each related party, (ii) the intangible assets it has developed, and (iii) the extent to which these intangible assets are used in the controlled transaction. The analysis focuses on products and markets, competitors, vendors, customers, and distribution channels resulting in a qualitative evaluation of the assignment of function and risks.