Transfer Pricing Landscape Shifts Amid IRS Changes and Tariffs

The transfer pricing landscape in 2025 has been characterized by unprecedented volatility and uncertainty. Following years of increased IRS hiring and funding, support for transfer pricing enforcement came to a screeching halt due to recent budget cuts and organizational instability. Despite these challenges, improved IRS case selection and development may still deliver some successes on examinations and litigation cases in the pipeline. Improved IRS success rates and §6662 penalty impositions have raised the profile of transfer pricing as an uncertain tax position (UTP) for financial reporting under Accounting Standards Classification 740 (ASC 740). The impact of the new global, material tariffs on transfer pricing compliance, and vice versa, has seized the attention of the C-suite at most multinational companies. As we look ahead, the interplay of reduced IRS resources, evolving litigation outcomes, heightened financial reporting scrutiny, and the complexities introduced by tariffs promises to keep transfer pricing at the forefront of multinational tax strategy and compliance efforts.

Transfer Pricing Enforcement and Litigation

Following decades of poor results in transfer pricing cases, the IRS recently achieved some wins (and partial wins) in transfer pricing litigation. Since 2012, the Transfer Pricing Practice (TPP) within the IRS Large Business and International division (LB&I) has exercised national oversight over transfer pricing case selection, issue development, and coordination with litigation teams. LB&I has been investing in additional personnel and technology to increase its coverage of transfer pricing issues. The IRS had addressed important intercompany indebtedness and intangibles issues with Generic Legal Advice Memorandums (GLAMs) and successfully launched a data analytics “compliance alert” initiative to inform foreign-owned distributors of perceived non-compliance.

In January 2025, the IRS budget was reduced to $12.3 billion, triggering the termination of thousands of probationary employees, many of whom were later reinstated, a move widely viewed as deliberately contributing to organizational instability. A return-to-office policy was implemented, further increasing workforce reductions. As a result, the IRS lost approximately 25% of its workforce, had six IRS commissioners in less than a year, and lost nearly all executives in international tax. IRS and DOJ Tax Division attorneys also were affected. The House subcommittee responsible for IRS funding approved a bill in July 2025 to further cut the IRS budget to $9.8 billion in 2026. During October 2025, the government shut down and furloughed its IRS workforce for more than a month. Additional reductions are anticipated under the proposed fiscal year 2026 budget, along with potential voluntary departures resulting from the furloughs.

In response to these changes and cutbacks, the IRS will need to reprioritize its enforcement approach to fit its substantially reduced resources. The IRS will need to support an unusually large inventory of transfer pricing disputes in the US Tax Court, district courts, and circuit courts as well as ongoing examinations. The IRS may be forced to curtail some of its enforcement initiatives and redirect resources to support ongoing cases, but the resource-effective data analytics efforts are likely to continue.

Due to reductions in personnel, particularly within the transfer pricing area, complex cases may increasingly be assigned to generalist examiners. This shift may result in heavier workloads and greater difficulty in managing these matters. In recent years, the IRS had begun a notable winning streak in transfer pricing cases. Now, with work force reductions and the likelihood of generalists taking on more cases amid ongoing instability, new challenges are likely to emerge. Additionally, the responsibility for resolving disputes will fall on a smaller group of individuals, demanding a greater share of their time and resources. To help accelerate dispute resolution, the IRS may increasingly rely on its alternative dispute resolution programs, aiming to reduce both costs and processing time. Further, without the personnel to expand coverage, efforts may be redirected towards data analytics efforts.

The following wins or partial wins at Tax Court are in various stages of appeal:

• The Coca-Cola Co. & Subs. v. Commissioner, 155 T.C. No. 10 (Aug. 2, 2024); . The Tax Court entered a decision against The Coca-Cola Company that reflects a tax underpayment of approximately $2.7 billion and interest of approximately $3.3 billion for tax years 2007 through 2009. The case has been appealed to the Eleventh Circuit.
• 3M Company & Subs. v. Commissioner, 160 T.C. No. 3 (Feb. 9, 2023). The Tax Court ruled in favor of the IRS in a “blocked income” case, resulting in a $27.3 million adjustment to reflect an arm’s length royalty rate from 3M’s Brazilian subsidiary. However, in late 2024, the US Court of Appeals for the Eight Circuit, citing Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (June 28, 2024), held that the IRS exceeded its authority and remanded the case to the Tax Court for further consideration.
• Medtronic, Inc. and Consolidated Subs. v. Commissioner, 900 F.3d 610 (8th Cir. 2018). Upon receiving the case for re-trial, the Tax Court applied a three-step unspecified method that resulted in approximately $1.4 billion in adjustments for tax years 2005 to 2006. The case was again appealed to the Eighth Circuit, which vacated the Tax Court’s decision, finding that the Tax Court erred in rejecting the IRS’ proposed transfer pricing method and had adopted a method not permitted under applicable regulations. The Eighth Circuit instructed the Tax Court to conduct further proceedings consistent with its opinion.
• Facebook, Inc. v. Commissioner, 164 T.C. No. 9, 2025 (May 22, 2025). The case focused on the valuation of intangible property rights transferred under a cost sharing arrangement. The decision endorsed the IRS’s transfer pricing method but rejected some inputs and assumptions.

The following cases have been filed in Tax Court, but not yet decided:

• Amgen Inc. et al. v. Commissioner, T.C., No. 16017-21 (petition filed July 26, 2021; partial summary judgment Apr. 4, 2024). The case focuses on the allocation of income between the US parent and its Puerto Rican manufacturing subsidiary for tax years 2010 to 2015. The IRS alleges a tax underpayment and penalties of $10.7 billion. The Tax Court heard arguments in 2024 but has not yet issued a decision.
• Newell Brands, Inc. v. Commissioner, T.C., No. 11897-24 (petition filed July 19, 2024). The IRS alleged that Newell’s comparable uncontrolled services price method for intercompany procurement services was not the best method because Newell’s comparable transactions were not comparable. IRS alleged an underpayment of $90 million of tax and $34 million in related penalties.
• Airbnb Inc. v. Commissioner, T.C., No. 12423-24 (petition filed July 30, 2024). The IRS claimed that Airbnb Inc. understated its US taxable income based on resources and rights that it made available to its Irish affiliate under a platform contribution agreement in a cost sharing agreement. Airbnb Inc. determined the cost of the licenses using an “income method”; the IRS employed an unspecified method. The IRS alleged an underpayment of taxes of $1.33 billion for 2013, plus $573 million in penalties.
• Abbott Laboratories v. Commissioner, T.C., No. 20193-24 (petition filed Dec. 26, 2024). Abbott filed in Tax Court to dispute IRS adjustments for tax year 2020 involving Abbott’s royalty income and inclusion of stock-based compensation in a cost-sharing arrangement and services transactions. Abbott filed similar Tax Court cases for tax years 2017 to 2019.

The following transfer pricing cases have been filed in district court:

• Perrigo Co. and Subs. v. Commissioner, No 1:17-cv-00737 (W.D. Mich.) (complaint filed Aug. 15, 2017). The IRS applied the common law economic substance doctrine to determine that Perrigo’s intercompany transactions were shams; alternatively, the IRS argued that Perrigo’s transactions were not arm’s length under §482. The US District Court for the Western District of Michigan rejected the IRS position and found that Perrigo’s arrangements had economic substance and were arm’s length, resulting in a tax refund of approximately $162 million.
• McKesson Corp. v. United States, No. 3:25-cv-01102 (N.D. Tex.) (complaint filedMay 2, 2025). McKesson filed a $10 million tax refund lawsuit alleging that the regulations requiring stock-based compensation in cost-sharing agreements are invalid. This position relies upon the holding in Loper Bright.

One major transfer pricing dispute is underway, but not yet in trial:

Microsoft Corp. Microsoft is engaged in a long-standing transfer pricing dispute for tax years 2004 through 2013. The IRS alleges that Microsoft improperly allocated profits among its global subsidiaries through cost-sharing arrangements that understated US taxable income. In October 2023, the IRS issued Notices of Proposed Adjustment (NOPAs) of approximately $28.9 billion of taxes, plus penalties, and interest. No formal litigation has been filed in the US Tax Court or district court to date.

Application of §6662 Penalties

The §6662 penalty provisions provide 20% or 40% penalties on tax underpayments due to transfer pricing; deficiencies involving more than $20 million of proposed tax adjustments can carry a 40% penalty. A reasonable cause and good faith exception allows taxpayers to avoid penalties on transactions for which the taxpayer has valid contemporaneous transfer pricing documentation that demonstrates the reasonableness of the taxpayer’s choice of pricing methods.

Until recently, the IRS did not apply the §6662 penalty provisions as assertively as the statute allows. However, the IRS has asserted these penalties more frequently in recent cases—Amgen ($10.7 billion of tax, penalties, and interest) and Microsoft ($28.9 billion of taxes, plus penalties, and interest). The IRS also asserted penalties in Newell and Airbnb. There is no reason to believe that the IRS will discontinue the practice of asserting penalties when thresholds are met and the agency deems documentation is insufficient.

Financial Reporting for UTPs

The improved IRS record in transfer pricing litigation and the increased assertion of transfer pricing penalties could change how entities evaluate their transfer pricing-related exposure for financial reporting. The financial reporting rules under ASC 740 dictate how companies report UTPs on their US Generally Accepted Accounting Principles financial statements. Tax “positions,” including transfer pricing issues, are evaluated using a two-step process. First, a tax position is only recognized if, based on the technical merits, that position is expected to be sustained upon examination. FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (June, 2006). If the position is recognized, the second step is measurement of the tax benefit,- “… the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.” FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (June, 2006).

Transfer pricing has become one of the most significant UTPs. The discussions regarding measurement of transfer pricing exposure could become much more complex. Companies under transfer pricing audits have historically taken the position that the company will prevail in the controversy, resulting in low or no tax reserve. This approach has also led to minimal disclosure of transfer pricing matters in financial statements.

The UTP disclosure for transfer is being contested in court. On March 13, 2023, the plaintiff, Roofers Local No. 149 Pension Fund sued Amgen Inc. and others based on Amgen’s alleged failure to adequately disclose information about transfer pricing disputes with the IRS regarding the allocation of profits between Amgen affiliates. The plaintiff claims that Amgen had specific information in its possession about IRS proposed adjustments before the filing of its Form 10-Q, but Amgen did not share that information in its 10-Q. In fact, Amgen disclosed the transfer pricing dispute with the IRS regarding the Puerto Rico transactions, explaining that the IRS positions were “without merit,” but omitted mention of the amount at issue for both periods in question—$10.7 billion in total. In response to Amgen’s pre-trial motion to dismiss the lawsuit, the judge characterized Amgen’s omission of the amount in dispute as similar to a child telling his parents that he had “dessert” when he had eaten the “whole cake.”

APMA Program

The IRS’s Advanced Pricing and Mutual Agreement Program has not been immune to the resource and staffing trends of the past year. APMA had been steadily adding personnel to its team, some with decades of experience, in hopes of accelerating the speed of resolution for MAPs and APAs. As of December 31, 2024, the APMA program employed 126 staff members including 76 team leaders, 12 managers, and 3 assistant directors. However, this trending momentum was disrupted with the change in administration.

In January 2025, the IRS, under the instruction of the current administration, implemented a reduction in workforce. As with the rest of the IRS, APMA probationary employees were terminated and later recalled. The disruption was further compounded by a wave of departures from senior leadership in the IRS’ international tax units under LB&I and the rollout of return-to-office mandates with limited facilities capacity.

Throughout the many changes and despite the headwinds, the APMA program has continued to develop and negotiate APAs. Some inefficiencies have been noticed due to changes in personnel and roles, but APMA has robust procedures and has continued with little change. APMA has been estimated to have lost roughly 10-20% of its workforce. Despite the internal changes, the fact that the program has continued to produce agreements is evidence of its adaptability.

Tariffs

Since January 2025, the Trump administration has raised tariffs on US imports to their highest average levels in recent history—from a universal 10% tariff on virtually all goods imported into the US to a 100% proposed tariff on some pharmaceuticals. The tariffs have been threatened, imposed, paused, increased, and declared possibly unconstitutional.

Because the tariff cost becomes part of the cost of goods sold for imported products, these tariffs have a direct impact on the operating income of the party bearing the tariff. Although the tariff rules impose initial responsibility for payment of the tariff on the “importer of record”, the parties may pass the tariff on to customers by increasing prices or shift/allocate the tariff costs to the exporter with a reduced import value. Any allocation arrangement between related parties must satisfy both customs and transfer pricing rules, which, depending on the size and impact of tariffs, can create compliance challenges.

If the entity bearing the tariff expense is the tested party for transfer pricing purposes, the impact of these large tariffs on the US importer’s profitability could push the operating margin out the bottom of the benchmarking range, thus requiring a post-importation transfer pricing adjustment to achieve an arm’s length result. For example, if a US distributor bears the tariff costs, the profitability of that distributor could be reduced from a comfortable operating margin of 5% to a loss of 15%. A negative 15% operating margin is unlikely to satisfy the IRS expectations of an appropriate return for a distributor, thus requiring an upward transfer pricing income adjustment to raise the US tested party’s results within the arm’s length range. An upward income adjustment can be made by reducing the import price for the goods purchased, thus requiring a downward customs valuation adjustment. Further, because the transfer price in most instances is also the import price, a post-importation price adjustment for customs purposes will also be required.

Under US transfer pricing rules, an upward transfer pricing adjustment to the income of a US-related party necessarily produces a downward adjustment to the income of the other transacting related party. The tax authority in the other involved country may not agree to the change. A US taxpayer can request the IRS’s assistance under a tax treaty to endeavor to achieve a downward adjustment to the income of the related party in a tax treaty country. This treaty mechanism, known as the Mutual Agreement Procedures (MAPs), allows treaty partners to eliminate double taxation arising from transfer pricing disputes. Based on informal discussions with some tax authorities, US treaty partners may object to the reduced tax revenues caused by the self-enriching tariffs imposed by the US government. Shifting the cost of tariffs to other tax jurisdictions through transfer pricing mechanisms will likely lead to some difficult discussions among tax authorities in bilateral negotiations between treaty partners in the MAP or in bilateral advance pricing agreements as taxpayers seek to avoid double taxation.

The impact of tariffs could easily be large enough to disrupt transfer pricing compliance. In appropriate circumstances, passing it on to customers or pushing it back to a principal may be appropriate and will reduce the impact. However, taxpayers still need to review their transfer pricing for this year and consider true-up adjustments.

In 2025, several practical factors coming together may reduce the likely impact of tariffs on transfer pricing:

• The tariffs have not been applicable for a full year.
• Many companies accumulated pre-tariff inventory and are still selling non-tariff goods.
• Some companies have been able to pass on a portion of the tariff costs to customers and/or shared the cost with the exporting party.
• Comparables used in benchmarking analyses may also bear tariffs, thus moving the benchmark.
• Most transfer pricing methodologies use multi-year averaging thus limiting the impact on the 2025 analyses.

For these reasons, the full impact of tariffs on transfer pricing compliance may not be felt until next year. Nonetheless, companies should still assess the impact of tariffs on their 2025 transfer pricing results and determine if and what true-up adjustments would be appropriate. Management would be advised to consult with their customs specialists to understand the impact of true-ups on customs compliance obligations.

In the longer term, companies may need to rethink their business strategy and consider reconfiguration of their supply chains, relocation of manufacturing/production, and other restructuring of functions, risks, and assets to mitigate the impact of tariffs. However, given the pending Supreme Court ruling on tariffs and the general variation in tariffs, it may be prudent to perform scenario analyses and be ready to act once there is more certainty and sense of direction.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Steven C. Wrappe is the National Technical Leader of Transfer Pricing in Grant Thornton’s National Tax Office and an adjunct professor in the New York University and University of California-Irvine tax programs. Glen Marku is a transfer pricing partner at Grant Thornton in Chicago and an adjunct professor at DePaul University’s Kellstadt Graduate School of Business. Hayley Yarem is a Transfer Pricing Manager at Grant Thornton in Raleigh with an MBA from Duke University.

Grant Thornton LLP and GT Advisors (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the American Institute of Certified Public Accountants Code of Professional Conduct and applicable law, regulations, and professional standards. Grant Thornton LLP is a licensed independent CPA firm that provides attest services to its clients, and GT Advisors and its subsidiary entities provide tax and business consulting services to their clients. GT Advisors and its subsidiary entities are not licensed CPA firms.

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