Transfer Pricing and Outbound Transfers of Intangible Property: IRS and Treasury Department Issue Proposed Regulations Relating to Outbound Transfers of Intangibles and Temporary Regulations Clarifying the Application of Transfer Pricing Rules to Such Transactions

Sullivan & Cromwell LLP - September 21, 2015

On September 14, 2015, the IRS and Treasury Department released proposed regulations under Section 367  (the “367 Proposed Regulations”) that, when finalized, will tax otherwise tax-free transfers of foreign goodwill and going concern value to foreign corporations.  Under the 367 Proposed Regulations, upon an outbound transfer of foreign goodwill or going concern value, a United States transferor will be subject to either current gain recognition under Section 367(a)(1) or to the deemed royalties rule of Section 367(d) even if the value of the transferred property was created exclusively through offshore activities.  This is a significant departure from current rules, and would significantly affect transactions such as foreign branch incorporations by United States taxpayers (including deemed incorporations resulting from “check-the-box” elections).  The 367 Proposed Regulations, if adopted, will tax transfers happening on or after September 14, 2015.

In addition, on September 14, 2015, the IRS and Treasury Department released temporary regulations under Section 482 (the “482 Temporary Regulations”) “clarifying” the application of the arm’s-length standard and the best method rule to offshore transfers of intangible property as well as to transactions governed by other provisions of the Code.