Secondary Transfer Pricing Adjustments on Non Pro Rata Profit Repatriation
Secondary adjustments recharacterize non-pro rata extraction as deemed dividends, triggering withholding tax that requires contractual indemnities.
Revenue Procedure 99-32
Meaning
An administrative ruling from the United States Internal Revenue Service provides guidelines for the tax-free repatriation of cash following a transfer pricing adjustment. The provisions of revenue procedure 99-32 allow multinational companies to conform their accounts to reflect a primary transaction correction without incurring additional tax liabilities. It governs transactions between commonly controlled business entities where the pricing of goods, services, or loans has been readjusted by tax authorities.
This mechanism prevents double taxation and helps companies reallocate funds legally.
Account Adjustment
Resolving discrepancies in intercompany transactions requires adjusting the balance sheets of the affected business entities. Once a primary pricing allocation has been modified, revenue procedure 99-32 allows taxpayers to establish a corresponding account receivable. This account reflects the cash that should have been transferred under the corrected model.
Cash Repatriation
Moving the money that corresponds to the tax correction must be completed within a specified timeframe to avoid further tax penalties. Under the terms of revenue procedure 99-32, the taxpayer can pay or receive the cash required to clear the established intercompany accounts without those payments being treated as dividends or capital contributions. This repatriation must be completed within ninety days of signing a closing agreement with the tax authorities.
Compliance Requirement
Taxpayers must satisfy specific procedural steps to qualify for the relief offered by the administrative guidelines. Filing a formal request before the primary tax adjustment is finalized is necessary to utilize revenue procedure 99-32. The application must detail the nature of the intercompany transactions, the adjustments being made, and the specific accounts to be established.
This documentation ensures that the tax authority can verify the transaction trail and confirm that the transfer of funds is handled in strict accordance with the ruling. Failure to submit this information correctly during the audit phase disqualifies the entity from tax-free treatment and results in the repatriated cash being taxed as a dividend.