All in the (Corporate) Family: Group Affiliation in Financial Transaction Transfer Pricing under the GLAM

In December 2023, the IRS published a generic legal advice memorandum (GLAM) that addresses the role of group membership in transfer pricing for intercompany financial transactions. The debate addressed by the GLAM centers around the question of whether “all relevant circumstances” under Section 482-2 includes the fact that the borrower is not an independent company but rather a member of the multinational group – and thus that an independent lender might expect other group members to “bail out” the borrower.

This issue will affect nearly every multinational operating in the US, especially foreign-headquartered companies. The IRS has periodically raised this issue in audits going back over a decade but has never had an official position on the matter.

At NABE’s 2024 Transfer Pricing Symposium earlier this month, I discussed the economic and financial analysis necessitated by the GLAM along with my fellow panelists (and some actively engaged audience members). The discussion covered:

• The GLAM and its legal basis
• Similar court cases in other jurisdictions
• Practical challenges for economic analysis under the GLAM
• Options for risk management in light of the uncertainty

The GLAM provides legal advice that that “all relevant circumstances” does include group membership – and thus most intercompany financial transactions are required to account for the effect of group membership on arm’s-length pricing. The GLAM does not, however, provide much practical advice about how to actually determine the effect – if any – of group membership.

The obvious transfer pricing answer is to look to third-party behavior as a benchmark. There is evidence that third parties do take group membership into account when pricing loans to subsidiaries; however, it is rare for subsidiaries to borrow from third parties without a legally binding guarantee from other group members, and the exceptions may bear little resemblance to the intragroup borrowers affected by the GLAM.

It remains to be seen whether or not the Tax Court will agree with the position in the GLAM; this issue is almost certain to be litigated, but likely not decided until 2025 or 2026. Thus, in the meantime, taxpayers are left to evaluate the potential impact of the GLAM despite this uncertainty.

Update: the link to view the event replay is no longer available.