Now that the dust from the U.S. Tax Cuts and Jobs Act (TCJA) is settling, it’s time for a clear look at the implications of this sweeping change on transfer pricing arrangements. A recent TP Week article indicates early prognostications, and one concern in particular, regarding the TCJA’s “significant” impact on transfer pricing were overblown, albeit at least in the foreseeable future.
“The fact that the corporate rates have flattened out doesn’t change the reality that each jurisdiction is entitled to the proper amount of tax according to traditional transfer pricing norms,” Michael Bernard, chief tax officer-transaction tax at Vertex, says in the article – which also features insights from Nancy Manzano, director in the chief tax office at Vertex. Nancy explains that it would take a far more dramatic change than the TCJA (i.e., formulary apportionment) to do away with transfer pricing’s longstanding arm’s-length principle. (In another Tax Matter post, Michael takes a look at how digital taxation might look under a formulary apportionment approach.)
The TP Week article concludes that while the TCJA has reworked U.S. tax law in significant ways, transfer pricing directors and their teams can rest easy, at least for the moment. “Unless companies have made changes to their supply chains, U.S. tax reform wouldn’t immediately affect their transfer pricing,” Nancy notes. “Tax law doesn’t always change the underlying economics.” Resting easy, alas, is not a luxury for corporate tax professionals managing responsibilities – and a daunting array of external challenges – that extend well beyond transfer pricing and the TCJA.
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