On January 15, 2025, the U.S. Internal Revenue Service (IRS) issued Memorandum AM 2025-001, which introduces significant amendments to apply Transfer Pricing, regarding, particularly, “periodic adjustments” and the Arm’s Length Principle. Although these guidelines focus on U.S. regulations, their influence may extend to multinational companies operating in Peru.
Understanding Periodic Adjustments and the Arm’s Length Principle
IRS Memorandum AM 2025-001 addresses the relationship between the general Arm’s Length rule and the specific periodic adjustment rules in the Transfer Pricing regulations. Specifically, it discusses whether a taxpayer can avoid a periodic adjustment by resorting to the Arm’s Length rule or the best method. According to the IRS, the Arm’s Length rule, implemented through the periodic adjustment rule mechanisms, achieves a result consistent with the Arm’s Length Principle, i.e., the IRS is authorized in appropriate circumstances to adjust based on the actual benefits realized by the assignee after the transfer of intangible property. According to the memo, “the income-proportionate standard, implemented through the mechanism of the periodic adjustment rules, achieves a result consistent with the general ALS” (AM 2025-001). The memo discusses two scenarios that are relevant to note:
- Scenario 1: Periodic Adjustment of Intangible Property License.
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- A company licenses an intangible asset to another related company with a fixed royalty.
- The IRS reviews whether the actual earnings were greater than initially estimated and, if so, may increase the amount of tax due.
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- Scenario 2: Periodic Adjustment of Cost-Sharing Arrangements (CSA).
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- Two companies share the costs to develop the technology.
- If the actual profits from that development are much higher than expected, the IRS may adjust taxes based on the actual profits.
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Implications for Multinational Companies in Peru
Although the memo focuses on U.S. regulations, multinational companies operating in Peru should be aware of these guidelines for several reasons:
- International Influence: IRS practices and guidelines are often referenced for other tax jurisdictions. Peruvian tax authorities may consider these guidelines when evaluating their own Transfer Pricing policies.
- Cross-Border Transactions: Peruvian companies transacting with U.S. subsidiaries or entities may be directly affected by these amendments, particularly regarding the appraisal and documentation of intangible transactions.
- Internal Policy Review: Companies in Peru should review and, if necessary, adjust their Transfer Pricing policies to ensure that they adequately reflect the actual earnings derived from intangibles and comply with international regulations.
Risks for Companies in Peru
- Unexpected tax adjustments: The U.S. parent company may be required to report additional income, increasing its tax burden.
- Double taxation: If the SUNAT (Superintendencia Nacional de Aduanas y de Administración Tributaria – National Superintendence of Customs and Tax Administration) in Peru does not recognize the IRS adjustment, the company could face a Transfer Pricing conflict with double taxation.
- Increased taxation: Peruvian authorities may be influenced by these measures and strengthen their own oversight over intangible transactions.
Recommendations for Peruvian Companies
Given the potential effects of these guidelines, Peruvian companies should:
- Evaluate intangible transactions: Review current and future transactions involving intangible property to ensure that the transfer prices established reflect the actual earnings obtained.
- Update Documentation: Maintain detailed and up-to-date documentation to support the Transfer Pricing policies and compliance with applicable regulations.
- Expert advice: Consult with Transfer Pricing specialists to fully understand the implications of the new guidelines and ensure compliance with local and international regulations.
Conclusion
The recent IRS guidelines can significantly amend the Transfer Pricing application, focusing on aligning pricing with the actual earnings obtained from intangibles. Companies in Peru, particularly those with international transactions, must be attentive to these developments and take proactive measures to ensure compliance and efficiency in their transfer pricing practices.
TPC Group: Your Transfer Pricing Partner
At TPC Group, we understand the complexity of Transfer Pricing regulations and their effects on international transactions. Our experienced team is at your disposal to assist your company in adapting to these new guidelines, ensuring regulatory compliance, and optimizing your tax strategies.
Contact us today for a customized consultation and keep your company on the cutting edge of Transfer Pricing.
Sources: Forbes / IRS