Missing or Inadequate Intercompany Agreements

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Recurring Losses or Very Low Margins in U.S. Subsidiaries

The IRS has been paying particular attention to certain foreign-owned U.S. distributors that report recurring losses or very low profit margins.

In late 2023 and early 2024, the IRS sent compliance alerts to more than 180 U.S. subsidiaries of large foreign corporations that reported losses or low margins from related-party transactions. The alerts were not formal audits. Instead, they asked taxpayers to review their transfer pricing positions and, where necessary, correct noncompliant positions.

The IRS has indicated that recurring losses or very low margins may raise concerns when a U.S. distributor has limited functions, assets, and risks. However, a loss is not automatically evidence of incorrect transfer pricing. A business may legitimately incur losses due to market conditions, start-up costs, economic downturns, or other commercial factors.

The key question is whether the U.S. company’s results are consistent with its actual functions, assets, and risks.

Companies with recurring losses or unusually low margins should therefore review their functional analysis, transfer pricing method, comparables, agreements, and actual financial results.