PORTFOLIO

Accounting for Income Taxes: Uncertain Tax Positions in Transfer Pricing (Portfolio 5004)

BNA Tax and Accounting Portfolio 5004, Accounting for Income Taxes: Uncertain Tax Positions in Transfer Pricing (Accounting Policy and Practice Series), provides an overview of the two-step process required under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740-10 (formerly FASB Interpretation No. 48 (FIN 48)) and its application to transfer pricing.

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DESCRIPTION

BNA Tax and Accounting Portfolio 5004, Accounting for Income Taxes: Uncertain Tax Positions in Transfer Pricing (Accounting Policy and Practice Series), provides an overview of the two-step process required under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740-10 (formerly FASB Interpretation No. 48 (FIN 48)) and its application to transfer pricing. The Portfolio provides guidance on determining the units of account and identifying uncertain tax positions; recognizing uncertain tax positions; and evaluating the arm's-length nature of intercompany pricing. It further explains measurement analyses; disclosures; and the key stakeholders affected by ASC 740-10 in relation to transfer pricing.
The first part of the Portfolio discusses ASC 740-10 and its application to transfer pricing, including a brief overview of the transfer pricing regulatory environment. The second part of the Portfolio explains the authors' approach to determining the unit of account for a transfer pricing position, identifying and documenting uncertain tax positions, and applying initial filters. The third part of the Portfolio discusses the recognition of uncertain tax positions. The fourth part of the Portfolio covers evaluating the arm's-length nature of intercompany pricing, specifically, key considerations when evaluating transfer pricing exposures. The fifth part of the Portfolio explains ASC 740-10‘s measurement requirements; how to identify information relevant to analyzing potential exposure; use of and framework for a preliminary test; and defining scenarios for transfer pricing. The sixth part of the Portfolio discusses disclosures in detail, particularly, interest and penalties; tabular reconciliations, quarterly and annual disclosures; “early warning” disclosures; the impact of court decisions; and compliance considerations. The seventh, and final, part of the Portfolio focuses on the responsibilities of the tax team, accounting team, and company executives as they relate to ASC 740-10 and transfer pricing.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5004, Desmond, Johnson, and Schuette, Accounting for Income Taxes: Uncertain Tax Positions in Transfer Pricing (Accounting Policy and Practice Series).


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AUTHORS

CHRISTOPHER DESMOND
Christopher Desmond was named as one of the world's leading transfer pricing professionals by Euromoney Legal Media Group and is one of the founding partners of Ceteris, now Duff & Phelps. Throughout his career, he has led initiatives related to global and domestic supply chain transfer pricing policies for various industries and company size. Christopher obtained his M.B.A. with a concentration in International Business and a B.S. in Management from Eastern Illinois University.

MICHELLE JOHNSON
Michelle Johnson is a Managing Director with Duff & Phelps and has significant experience advising clients on transfer pricing and valuation matters, including ASC 740-10 recognition and measurement analyses, Advanced Pricing Agreements, cost sharing analyses, buy-in valuations, supply chain restructuring, and transfer pricing documentation. Michelle obtained her Masters degree in Economics from New York University and a B.S. in Economics and French from the University of Illinois.

MARK SCHUETTE
Mark Schuette is a Managing Director with Duff & Phelps in Atlanta and has over 25 years of experience consulting with clients on business, accounting, and tax issues. Prior to joining Duff & Phelps, Mark was with Ceteris as a Managing Director for eight years and with Ernst & Young in Atlanta for 10 years, where he was the Partner-in-Charge of the Southeast Transfer Pricing and Economics practice. Mark holds an M.B.A. in Finance and a B.B.A. in Accounting from Loyola University Maryland. He is a member of the American Institute of Certified Public Accountants.

TABLE OF CONTENTS

Portfolio 5004-1st: Accounting for Income Taxes: Uncertain Tax Positions in Transfer Pricing

Portfolio Description

Authors

Description

Detailed Analysis

I. Overview of ASC 740-10 and Its Application to Transfer Pricing

Introductory Material

A. Scope and Purpose of ASC 740-10

B. Transfer Pricing and ASC 740-10

C. Companies Requiring ASC 740-10 Analyses of Transfer Pricing-Related Tax Positions

D. Effective Dates

E. Summary of Transfer Pricing Regulatory Environment

1. Arm's-Length Standard

2. Uncertainties Inherent in Transfer Pricing-Related Tax Positions

3. Relative Importance of Transfer Pricing Uncertain Tax Positions (UTPs)

4. Unique Aspects of Transfer Pricing Exposures

II. Units of Account and Identifying Uncertain Tax Positions Related to Transfer Pricing

Introductory Material

A. Defining a Unit of Account Under ASC 740-10

B. Defining a Unit of Account Related to Transfer Pricing

1. Level at Which Companies Prepare and Support Transfer Pricing Positions on Income Tax Returns

a. Transaction Type

b. Defining a Unit of Account at the Income/Expense Level vs. Tax Benefit

c. Use of Annual Amounts

d. Pairs of Jurisdictions

2. Referring to Annual Amounts Charged for Given Transaction Types Between Pairs of Legal Entities

C. Identifying and Documenting UTPs Related to Transfer Pricing

1. Sources of Data for Potential Transfer Pricing UTPs

2. Key Information Needed for Each UTP

3. Documenting UTPs

D. Applying Initial Filters

1. Immateriality

2. Intra-Jurisdiction Transactions

3. Closed Tax Years

4. Lack of Regulatory Requirements

5. Conclusion Regarding Use of Filters

III. Recognition of Uncertain Tax Positions Related to Transfer Pricing

IV. Evaluating the Arm's-Length Nature of Intercompany Pricing

Introductory Material

A. Relationship to ASC 740-10 Analysis

B. Key Considerations When Evaluating Transfer Pricing Exposures

1. Transfer Pricing Adjustments Defined

2. Transfer Pricing Audit Process

3. Effect of Transfer Pricing Adjustments on Financial Statements

4. Competent Authority Facilities for Resolving Conflict Among Multiple Jurisdictions

5. Advanced Pricing Agreements' Effect on Reducing Transfer Pricing Uncertainty

V. Measurement Analyses

Introductory Material

A. ASC 740-10 Requirements on Measurement

B. Identifying Information Relevant to Analyzing Potential Exposures

1. Nature of the Transaction

2. Audit History

3. Existence of a Transfer Pricing Study

4. Intercompany Agreements

5. Actual Charges Recorded

6. APA

7. Competent Authority

8. Entity Profitability

C. Use of and Framework for Preliminary Test

D. Defining Scenarios for Transfer Pricing

1. Restrictive Assumptions

2. Considerations Regarding Scenarios for Transfer Pricing

a. Evaluation of Alternative Methods

b. Comparables Selection

c. Characterization of Transactions

d. Special Considerations for Services and IP

e. Considering Both Sides of a Transaction

(1) Asymmetries Between Transfer Pricing Requirements

(2) Differing Rules on Acceptable Methodologies

(a) Selection of Method

(b) CPM Under U.S. Treasury Regulations Versus TNMM Under OECD Guidelines

(3) Convergence of U.S. Rules and OECD Guidelines

(4) Differing Perspectives on Calculating Arm's-length Ranges

(a) Inconsistent Use of Interquartile Ranges

(b) Inconsistencies in Use of Multi-Year Averages

f. How to Interpret Effective Settlement for Transfer Pricing Positions

(1) Considerations of Negotiations Between Taxpayer and Tax Authorities

(a) Rules About Netting Between Units of Account

i. Netting Under a Transfer Pricing Audit

ii. Netting Under ASC 740-10

(2) Considerations of Negotiations Between Multiple Tax Authorities

(a) Competent Authority Considerations

E. How Many Scenarios Do You Need to Evaluate for Transfer Pricing Positions?

F. Assigning Probabilities

VI. Disclosures

Introductory Material

A. Interest and Penalties

1. Example 1

B. Tabular Reconciliations

1. Example 2

C. Quarterly and Annual Disclosures

D. “Early Warning” Disclosures

E. Effect of Court Decisions

F. Compliance Considerations

G. Schedule UTP

VII. Stakeholders Who Need to Know About ASC 740-10 and Transfer Pricing

Introductory Material

A. Tax Team's Responsibilities

1. Identifying UTPs for Transfer Pricing Purposes

2. Quantifying and Communicating Results of ASC 740-10 Analyses

3. Options to Reduce Uncertainty

a. CAP Audit Program

b. Global Transfer Pricing Policy Report

c. Advanced Pricing Agreement (APA)

d. Additional Options to Reduce Uncertainty

4. Keeping Current and Staying Ahead of New Laws and Potential Audits

B. Assessing and Reacting to ASC 740-10 UTPs for Transfer Pricing by the Accounting Team

C. CFOs and Company Executives Responsibilities for Reviewing and Approving

1. Reviewing and Approving UTPs for Transfer Pricing by the CFO

2. Presenting UTPs to the CEO and Board of Directors

3. Commitment From the External Auditing Team to Be Actively Involved in Process

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Sample Ceteris ASC 740-10 Process

Worksheet 2 Case Study

Worksheet 3 Example of ASC 740-10-55-102 — Scenario Development

Worksheet 4 Unit of Account Definition Support

Worksheet 5 Stakeholders of ASC 740-10 for Transfer Pricing

Worksheet 6 Examples of Questions Posed by CFOs Regarding ASC 740-10 Analyses of Transfer Pricing

Bibliography

OFFICIAL

Statutes

Court Decisions

SEC Regulations

Treasury Regulations

IRS Revenue Procedures Rulings

SEC Guidance

FASB Guidance

FASB Legacy Guidance

AICPA Guidance

OECD Guidance

IRS Materials

UNOFFICIAL

Tax Management Transfer Pricing Report

2011

2009

2008

2007

2006

2004

2003

2002

Tax Management Portfolios

Articles

2010

2009

2008

2007

2006

2004