Overview
Partners Steve Dixon and Amanda Pedvin Varma co-authored an article in Bloomberg Tax titled "IRS Transfer Pricing Memo on Implicit Support Has Legal Flaws." The article suggests that multinational enterprises that are facing IRS transfer pricing adjustments to their intercompany lending rates based on implicit support have grounds to challenge the IRS's legal reasoning.
The Treasury Regulations do not expressly require taxpayers to consider implicit support when pricing intercompany loans. In December 2023, the IRS Chief Counsel issued a generic legal advice memorandum (AM 2023-008) aimed at filling that gap. The GLAM says that when pricing intercompany debt that a US subsidiary owes to its foreign parent, the arm’s-length standard permits the IRS to decrease the interest rate as needed to account the implicit support that the foreign parent would presumably provide to the US borrower. At the same time, the GLAM rejects the notion (advocated by some taxpayers) that the lending rate should account for the foreign parent's costs in providing that implicit support.
The article explains why Taxpayers should contest the legal basis for such an adjustment. The GLAM relies on an interpretation of the arm's-length standard under which the IRS may consider some facts (namely that the borrower will benefit from the parent’s implicit support) but ignore other facts (namely that it is the lender who is expected to provide the borrower with support). That interpretation and the other arguments in the GLAM are, as a legal matter, questionable and taxpayers facing such adjustments would be wise to attack those issues.
