Transfer Pricing and APAs

Eaton Corp. and the IRS entered into two advance pricing agreements (APAs) establishing transfer pricing methodologies for certain intercompany transactions between Eaton and its Puerto Rico subsidiaries. The APAs covered taxable years 2001–2005 and 2006–2010. In 2011, the IRS unilaterally and retroactively canceled the APAs.

Brattle was retained by the taxpayer’s counsel to identify and support testifying experts on issues including Eaton’s implementation of the APAs, arm’s-length pricing of intermediary products, sales and administrative services, research and development activities, and the selection of the best transfer pricing method. The Tax Court concluded that the IRS’s cancellation of the APAs was an abuse of discretion and that Eaton was not required to adjust its transfer pricing under IRC §482.

In rejecting the IRS’s justifications for canceling the APAs, the court relied substantially on quantitative analyses by a Brattle-supported accounting expert, Professor Shannon Anderson of the University of California, Davis. Her expert reports and testimony demonstrated that Eaton’s APA implementation errors were inadvertent and would not have resulted in a significantly or materially different APA.