April 18, 2019 / North America
The Internal Revenue Service (IRS) Advance Pricing and Mutual Agreement (APMA) program announced recently that it has developed a “functional cost diagnostic model” (FCDM), an Excel-based program, to facilitate its review of certain Advance Pricing Agreement (APA) requests. The APMA Program, which oversees all Advance Pricing Agreement and Competent Authority transfer pricing cases, indicated the FCDM would require the participating taxpayer to provide specified financial information for cases in which “material non-benchmarkable contributions” form a part of the covered transactions in an APA request. That is, for complex cases where both parties are seen to make non-routine contributions to the value chain. APMA believes that the FCDM model may be able to demonstrate more reliable results for such intercompany transactions by applying a profit split methodology rather than a one-sided profitability analysis (e.g., Comparable Profit Method (CPM) / Transactional Net Margin Method (TNMM)).
In January 2018, the IRS updated the transfer pricing examination guide which provided new guidelines in analyzing the method selected by the taxpayer for the documentation and the APA. The new process would allow the examiners to look into the functions, assets and risks of the related parties and use an alternative method if it seems more reliable. Below are the extracts from the instructions released by the IRS.