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Specialty Tax Spotlight – Economic Substance and the Impact on Transfer Pricing

Video
Learn how businesses can prepare for the implications of economic substance on transfer pricing and IRS challenges.
January 28, 2025
Sean Muller
Sean Muller
Partner-in-Charge, Specialty Tax Services
National Market Leader, Private Equity
Josh Finfrock
Josh Finfrock
Director, Transfer Pricing

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Specialty Tax Spotlight

In this episode of Weaver: Beyond the Numbers, Specialty Tax Spotlight, Sean Muller and Josh Finfrock dive into the complexities of economic substance and its impact on transfer pricing. They discuss recent IRS developments and provide actionable insights to help businesses navigate these challenges effectively.

Key Points:

  • Economic substance has recently gained traction in transfer pricing discussions due to shifts in IRS requirements and court cases like Liberty Global.
  • Businesses must enhance their documentation to address both traditional transfer pricing requirements and potential economic substance arguments.
  • Controlling the narrative and aligning transactions with economic substance principles can help minimize risks and penalties.

 

Sean and Josh explored how economic substance, a test traditionally not applied in transfer pricing cases, has entered the IRS’ current toolkit. This shift stems from a change in IRS internal procedures, removing the need for executive approval to assert economic substance in transfer pricing cases. But highly structured, multi-step transactions are most vulnerable to IRS scrutiny under this expanded framework.

To mitigate risks, companies should ensure their documentation reflects both compliance with transfer pricing regulations and alignment with economic substance principles. “The narrative may need to include some other things and think through new concerns, but that’s still the number one defense: having given it rational thought and documented what we need,” said Josh.

The hosts conclude that although the IRS appears to be growing more assertive, their ultimate goal is still to encourage taxpayer compliance and equitable treatment. They advocate for businesses to align with IRS regulations, engage in open discussions about economic substance and transfer pricing and create robust transfer pricing documentation.

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