It is our belief that the central transfer pricing issues for taxpayers and the IRS is
foregone opportunities on the part of both parties as well as with their foreign coun-
terparts. We support the advance pricing agreement process, whether unilateral, bi-
lateral, or multilateral.
(b) Competent Authority Considerations. We believe that the competent authority
process is too slow to be effective, whether on the part of the taxpayer in dealing with
the IRS, or with the IRS in dealing with the IRS’s foreign counterparts.^6 We favor a
change in the competent authority process and in the bilateral APA process that
would bring the following parties to the table:
- The taxpayer
- The IRS
- The foreign affiliate of the U.S. taxpayer
- Tax authorities of the foreign government
We recognize the IRS’s position that they view the competent authority process as
being government to government, and that taxpayers are being told to “butt out.” In
our view, a number of taxpayers have lost the respect of the competent authority
process because of the IRS’s viewpoint and the slowness of the process itself.
29.10 GRAY MARKET CONSIDERATIONS. Gray market sales begin when a manu-
facturer sells its products to retailers in different locations. The sales price differs
sharply from one location to another.^7 A purchaser buys the product from the retailer
at the lower cost then available at the low cost jurisdiction. The purchaser makes use
of this pricing differential by reselling the goods into a higher priced jurisdiction at a
higher price. This price is still lower than the price charged by the
manufacturer/seller in that second market.
All too often, IRS examiners, upon viewing a scheme or device that seems unusual
to them, suspect that the taxpayer has concocted a device that has as its primary pur-
pose the saving of taxes. The facts are often otherwise. In the gray market situation,
these schemes or devices may be designed for nontax purposes, such as a device to
siphon off the manufacturer’s profits.
Misdirection of sales—whether inadvertent or not—becomes crucial. These
schemes may have tax ramifications that the IRS is likely to miss because the IRS is
looking elsewhere. Here the examiner is reviewing the manufacturer and the seller in
a quest for transfer pricing adjustments, but the purchaser who resold the goods un-
beknown to the manufacturer caused the potential adjustments.
(a) Example. V Corporation, headquartered in country V, produces kimonos in
country V and sells kimonos in two countries, Country V and in Country J, for $25
each. In addition, V Corporation sells 200,000 kimonos in the United States, of which
29 • 16 TRANSFER PRICING FOR INTERCOMPANY TRANSACTIONS(^6) Paul C. Rooney, Jr., Darren R. Fortunato, and Nelson Suit, “Competent Authority,” Transfer Pricing
Handbook#2, 3rd ed., edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 74.1.
(^7) Thomas E. Johnson, “Antitrust, Customs, Gray Market, and Other Nontax Transfer Pricing Consid-
erations,”Transfer Pricing Handbook#2, 3rd ed., edited by R. Feinschreiber (New York: John Wiley &
Sons, 2001): Section 85.6.