The Internal Revenue Service (IRS) announced on March 15, 2013, that it is consulting interested parties on the development of a model memorandum of understanding (MOU) between Competent Authorities relating to transfer pricing safe harbors for routine distribution functions. The IRS is looking for specific comments including proposed text for draft agreements. The development of an appropriate model MOU would help to avoid compliance costs for taxpayers while at the same time reducing the risk of double taxation that sometimes accompanies safe harbor provisions.
On June 6, 2012 a discussion draft on transfer pricing safe harbors was issued by the Organization for Economic Co-operation and Development (OECD). The OECD discussion draft included draft sample memoranda of understanding on a number of “low-risk” functions, including the distribution function.
To avoid double taxation, companies that are subject to a transfer pricing adjustment in the United States may request Competent Authority assistance under the mutual agreement process if that second jurisdiction is a U.S. tax treaty partner. Double taxation of a group of companies may be avoided if a secondary adjustment is made in respect of the taxable profits of the related party in the other contracting state. The introduction of safe harbors may make the mutual agreement process more difficult, unless a MOU is in place with the treaty partner with respect to transfer pricing for low risk functions.
