Transfer pricing enters a new era of volatility and scrutiny in 2025
The transfer pricing environment in 2025 has shifted faster than the IRS can hire, fire, or reinstate employees.
Years of expanded enforcement gave way to steep budget cuts, workforce churn, and operational instability. Despite that turbulence, the IRS continues to refine case selection, push penalties under §6662, and develop litigation positions.
Companies also face new pressure from ASC 740 reporting and the economic shock created by global tariff hikes. The combined effect keeps transfer pricing at the center of multinational tax strategy.
Enforcement and litigation
The IRS had begun building momentum in transfer pricing enforcement after decades of poor results. The Transfer Pricing Practice within LB&I expanded its role in case selection and development. The agency invested in personnel, technology, and analytics addressing intercompany debt and intangible property.
That trajectory reversed in January 2025.
The IRS budget dropped to $12.3 billion. Thousands of probationary employees were terminated, then partially reinstated. Attrition followed the return-to-office mandate. The agency cycled through six commissioners in less than a year. Nearly all executives in international tax departed. DOJ Tax Division attorneys were also affected.
Congress then advanced a 2026 budget target of $9.8 billion. A month-long federal shutdown in October 2025 furloughed the IRS workforce. More departures are expected under the fiscal year 2026 proposal.
With fewer resources, the IRS will need to prioritize ongoing litigation and active examinations. Analytics-driven initiatives are likely to survive because they require fewer staff. Complex transfer pricing issues may increasingly fall to generalist examiners. That shift raises workload and quality risks.
Recent IRS wins or partial wins are now in various stages of appeal:
Coca-Cola Co. & Subs. v. Commissioner, 155 T.C. No. 10 (2024). The Tax Court entered a decision reflecting approximately $2.7 billion of tax underpayment and $3.3 billion of interest for 2007 to 2009. Coca-Cola appealed to the Eleventh Circuit.
3M Co. & Subs. v. Commissioner, 160 T.C. No. 3 (2023). The Tax Court adopted the IRS's view on blocked income. The Eighth Circuit later held that the IRS exceeded its authority in light of Loper Bright and remanded the case.
Medtronic, Inc. v. Commissioner. The Tax Court used an unspecified three-step method and issued adjustments totaling $1.4 billion. The Eighth Circuit vacated the decision and instructed further proceedings.
• Facebook, Inc. v. Commissioner, 164 T.C. No. 9 (2025). The Tax Court endorsed the IRS method for valuing intangible property in a cost-sharing arrangement, though it rejected certain inputs.
Pending Tax Court cases include Amgen ($10.7 billion at issue), Newell Brands, Airbnb, and multiple Abbott years.
District court litigation includes:
Perrigo Co. v. United States. The Western District of Michigan rejected the IRS economic substance and §482 arguments and awarded a refund of about $162 million.
McKesson Corp. v. United States. McKesson filed a $10 million refund claim challenging the validity of stock-based compensation regulations under Loper Bright.
Microsoft faces proposed adjustments of approximately $28.9 billion for 2004 to 2013, but has not yet entered formal litigation.
Penalty trends under §6662
The IRS now asserts §6662 penalties far more aggressively. Adjustments exceeding $20 million can trigger a 40% penalty.
Historically, these penalties were applied sparingly. Recent cases show a shift. The IRS asserted penalties in Amgen, Microsoft, Newell, and Airbnb.
Taxpayers rely on contemporaneous documentation to establish reasonable cause and good faith. Documentation quality is now under closer scrutiny, which raises penalty exposure.
Financial reporting under ASC 740
Stronger IRS litigation results and increased penalties change how companies evaluate transfer pricing exposure in financial statements.
ASC 740 applies a two-step test requiring recognition and measurement of tax benefits based on the likelihood of sustaining a position. Transfer pricing is now one of the largest UTP categories.
Companies historically disclosed little because they assumed they would prevail in examination or litigation. That approach isn’t good enough.
One dispute highlights the stakes.
The Roofers Local 149 Pension Fund sued Amgen in 2023 for omitting the dollar amounts at issue in its Puerto Rico transfer pricing dispute. The court compared Amgen’s disclosure to a child describing eating “dessert” instead of admitting he ate the “whole cake”.
The case signals heightened scrutiny of transfer pricing transparency in public filings.
Tariffs and transfer pricing
Since January 2025, the administration has raised tariffs to their highest average levels in modern practice. A universal 10% tariff applies to nearly all imports. Some products, including pharmaceuticals, face proposed tariffs of 100%.
The status of certain tariffs remains unsettled due to pauses, increases, and constitutional challenges.
Tariffs flow through cost of goods sold and directly affect operating income. Parties may try to shift the burden by raising prices or reallocating costs between related parties. Any such arrangement must satisfy both customs and transfer pricing standards.
Enormous tariff costs can push the tested party outside the arm’s length range. A US distributor bearing tariffs can swing from a 5% margin to a 15% loss. An upward transfer pricing adjustment may be required. That often links directly to customs valuation and can trigger a downward adjustment of import value.
Full tariff effects may not appear in 2025 results due to partial year applicability, pre-tariff inventory, partial cost sharing with customers or suppliers, comparable companies facing similar tariffs, and multi-year averaging in transfer pricing analyses. Even so, taxpayers should assess 2025 true-up needs and prepare for larger effects in 2026.
Long-term planning may involve supply chain redesign, production relocation, or functional realignment. A Supreme Court ruling on tariff authority could influence strategy.