On January 15, 2025, the United States Internal Revenue Service (IRS) issued memorandum AM 2025-001, which introduces significant changes in the application of transfer pricing, especially with regard to “periodic adjustments” and the arm’s length standard. Although these guidelines focus on US regulations, their influence may extend to multinational companies with operations in Peru.
Understanding Periodic Adjustments and the Arm’s Length Standard
IRS memorandum AM 2025-001 addresses the relationship between the general arm’s length standard and the specific periodic adjustment rules in transfer pricing regulations. Specifically, it analyzes whether a taxpayer can avoid a periodic adjustment by invoking the arm’s length standard or the best method rule. The IRS concludes that the arm’s length standard, implemented through the mechanisms of the periodic adjustment rules, achieves a result consistent with the general arm’s length standard. This means that, in appropriate circumstances, the IRS is authorized to make adjustments based on the actual benefits obtained by the transferee after the transfer of intangible property. As stated in the memorandum, “the proportional income standard, implemented through the mechanics of the periodic adjustment rules, achieves a result consistent with the general ALS” (AM 2025-001).
The memorandum analyzes two scenarios, which are important to highlight:
- Scenario 1: Periodic adjustment of the intangible property license
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- One company licenses an intangible asset to another related company for a fixed royalty.
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- The IRS reviews whether the actual profits were greater than initially estimated and, if so, can increase the amount of taxes owed.
- Scenario 2: Periodic adjustment of Cost Sharing Agreements (CSAs)
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- Two companies share costs to develop technology.
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- If the actual profits from that development are much higher than expected, the IRS can adjust the taxes based on the actual profits.
Implications for Multinational Companies in Peru
Although the memorandum focuses on US regulations, multinational companies with operations in Peru should pay attention to these guidelines for several reasons:
- International Influence: IRS practices and guidelines often serve as a reference for other tax jurisdictions. It is possible that the Peruvian tax authorities will consider these guidelines when evaluating their own transfer pricing policies.
- Cross-Border Operations: Peruvian companies that carry out transactions with subsidiaries or entities in the United States could be directly affected by these changes, especially with regard to the valuation and documentation of transactions with intangibles.
- Review of Internal Policies: Now is a good time for companies in Peru to review and, if necessary, adjust their transfer pricing policies to ensure that they adequately reflect the real benefits derived from intangibles and comply with international regulations.
Risks for Companies in Peru
- Unexpected tax adjustments: The US parent company could be forced to declare additional income, increasing its tax burden.
- Double taxation: If the National Superintendency of Customs and Tax Administration (SUNAT) in Peru does not recognize the IRS adjustment, a transfer pricing conflict could arise, resulting in double taxation for the company.
- Increased scrutiny: Peruvian authorities may be influenced by these measures and may strengthen their own oversight of transactions involving intangibles.
Recommendations for Companies in Peru
Given the potential impact of these guidelines, Peruvian companies are advised to:
- Evaluate Transactions with Intangibles: Review current and future transactions involving intangible property to ensure that the established transfer prices reflect the actual profits obtained.
- Update Documentation: Maintain detailed and up-to-date documentation that supports transfer pricing policies and demonstrates compliance with applicable regulations.
- Seek Expert Advice: Consult with transfer pricing specialists to fully understand the implications of the new guidelines and ensure compliance with both local and international regulations.
Conclusion
The recent IRS guidelines represent a significant change in the application of transfer pricing, with an emphasis on aligning prices with the actual profits obtained from intangibles. Companies in Peru, especially those with international operations, should be aware of these developments and take proactive measures to ensure compliance and efficiency in their transfer pricing practices.
TPC Group: Your Partner in Transfer Pricing
At TPC Group, we understand the complexity of transfer pricing regulations and their impact on international operations. Our team of experts is ready to advise your company on how to adapt to these new guidelines, ensuring regulatory compliance and the optimization of your tax strategies.
Contact us today for a personalized consultation and keep your company at the forefront of transfer pricing.
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