(b) Internal Revenue Service Activities. In recent years, the Internal Revenue Ser-
vice has focused a great deal of attention on transfer pricing issues, and Congress has
been granting the Internal Revenue Service greater authority to develop the infor-
mation that it claims it needs to administer this provision properly. All taxpayers are
required to maintain records and documents relevant to the determination of their
transfer pricing prior to the filing of their tax return and, if requested, to furnish these
records to the Internal Revenue Service within 30 days of the IRS request. Initial re-
quests for information necessary to an IRS audit are generally submitted to the tax-
payer in the form of IDRs. The IRS is empowered, for the purposes of ascertaining
the correctness of any return, or making a return where none has been made, to de-
termine the tax liability of any person or to collect any such liability, (1) to examine
any books, papers, records, or any other data that may be relevant or material to such
inquiry, (2) to summon the person liable for tax or required to perform the act, or any
officer, employee, or such person having possession, custody, or care of books of ac-
count containing entries related to the business of the person liable for tax or re-
quired to perform the act, or any other person the IRS may deem proper to appear
before the IRS at a time and place named in the summons and to produce such books,
papers, records, or other data, and to give such testimony under oath, as may be rel-
evant or material to such inquiry, (3) to take such testimony, from the person con-
cerned, under oath, as it may be relevant or material to such inquiry. Through the use
of whatever information the IRS obtains, it will generally attempt to construct,
through economic analysis and other means, what it believes to be an appropriate
arm’s-length price and, to the extent this price differs from the price actually charged
in the transaction under review, to make appropriate adjustments to the tax liability
of the taxpayer.
The IRS primarily focuses on U.S. subsidiaries of foreign multinationals and tax-
haven subsidiaries of U.S. multinationals.
30.6 FOREIGN CURRENCY ISSUES. The 1986 Tax Reform Act introduced, for the
first time, a comprehensive set of rules governing the taxation of foreign currency
gains and losses. These provisions, which provide greater certainty for the tax treat-
ment of normal commercial transactions, are based on the functional currency con-
cept of FAS No. 52. Under this concept, all determinations have to be made in the
taxpayer’s functional currency.
(a) Functional Currency and Qualified Business Unit. The functional currency is au-
tomatically the U.S. dollar, except for a “qualified business unit” (a self-contained
foreign operation or QBU), in which case it is a currency:
- Used to keep the books and records
- Of the economic environment in which a significant part of the business unit’s
activities generating revenues and expenses are conducted - Used to borrow or lend
A QBU that would otherwise be required to use a hyperinflationary currency as its
functional currency must use the U.S. dollar as its functional currency.
30 • 16 INTERNATIONAL TAXATION