The Internal Revenue Code (IRC) Section 482: Allocation of income and deductions among taxpayers authorizes the IRS Commissioner allocation of income and deductions between related entities for comparing tax obligations.
IRC section 482 compares a controlled taxpayer with an uncontrolled taxpayer according to arm's length pricing to determine tax liabilities for the prevention of tax evasion and to reflect accurately the income of such entities.
It also stipulates income derived from any transfer of intellectual property must commensurate with the income attributed to it.
Although the actual IRC Section 482 is brief, it is supported by Treasury Regulations that:
- Provide terminology
- Describe applications and methods for allocation
- Provide scope and purpose
- Institute ways to determine taxable income
Complexities in arm's length pricing
There are many corporations and circumstances that have no direct comparisons to another company, such as marketing in new territories or intellectual properties. Income tax allocation is accomplished through the application of arm's length pricing under the guidance of the best method rule.
What does that mean?
In essence, the specific methods used are not prioritized. Instead, the results of controlled transactions has to be determined by the method that provides the most reliable arm's length measurement according to the facts and circumstances.
In cases where multiple methods have been used, the method that provides the most accurate and reliable data must be implemented.
Economical expertise with real world solutions
Don't let Section 482 transfer pricing intimidate you.
Understanding how the Internal Revenue Code Section 482 impacts you and your business, especially IC-DISC, transfer pricing studies, and cost-sharing agreements, can be confusing in the best circumstances. Expert tax advice can be the key to avoiding unnecessary.
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