The US Bankruptcy Court for the Middle District of North Carolina (Greensboro Division) has rejected an IRS transfer pricing adjustment because the taxpayer would incorrectly considered to be an independent distributor Re: Case No. 09-10846C-11G, 18 March 2014). The correct characterization of an entity’s functions is an important part of a transfer pricing analysis. The most suitable transfer pricing method is determined by factors that include the functional analysis of the entity and the availability of comparable data.
The case involved a Hong Kong parent company that sold furniture through a US subsidiary. The IRS made transfer pricing adjustments based on a view that the US subsidiary was an independent distributor of the Hong Kong parent, and its net operating margins required a greater mark up to be in line with comparable entities. The Court however agreed with the US subsidiary’s objection to this view as the characterization of the company by the IRS was incorrect.
