Inbound Distribution Company

 

The IRS Large Business and International Division (“LB&I”) announced the identification and selection of 13 campaigns that will be the focus of the agency’s enforcement efforts.  The campaigns have been implemented to deploy IRS resources to address the most serious tax administration risks, including transfer pricing compliance of US Inbound Distribution Companies.

 

Sharon Porter, director of the Treaty and Transfer Pricing Operation Practice Area, is the lead executive for this campaign.  Its goal is to verify whether inbound distributors receive an arm’s length return rather than the losses or small profits some inbound distributors, especially in the middle market, have been earnings.  IRS believes that there was a widespread practice of not adequately compensating inbound distributors in the middle market and caused a substantial revenue loss for the Government.

 

U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive audit strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue.

 

Take Away:  It is expected that there would be increasing number of audit selections among U.S. distributors of goods sourced from foreign-related parties and the adequacy of these inbound distributors’ intercompany pricing would be scrutinized.  In order to avoid above complexes with the taxing authority and the sever IRC Section 6662 penalties, U.S. inbound distributors with foreign related party sourcing should obtain contemporaneous documentation with respect to its transfer pricing arrangement.

 

A copy of IRS’s Practice Unit is attached for your reference.

[Reference: Inbound Resale Price Method Routine Distributor.pdf]