IRS Tightens Grip on Transfer Pricing Rules for Intangible Acquisitions

Cross-border mergers and acquisitions continue to be a common growth strategy for multinationals despite economic uncertainty, according to industry trends. The acquisition of new products, innovative features, talent, and other strategic assets, or acquired intangibles, is a key driver of these deals.

The IRS has increased its enforcement focus on transfer pricing rules with respect to intangibles in recent years. This shift is evident in the agency's wins and partial wins in major disputes, including Altera (2019), Coca-Cola (2020), and Medtronic (2022). The Tax Court's opinion in Coca-Coca is currently pending appeal in the Eleventh Circuit.

The transfer pricing treatment of acquired intangibles presents unique challenges. Unlike a single intangible asset, most acquisitions involve tangible assets, ongoing business operations, and intangibles unrelated to the acquiring company. Valuing these acquired intangibles for financial reporting purposes differs substantially from valuing them for tax purposes.