40% transfer pricing penalty upheld.

• Jurisdiction: United States
• Author: Shapland, Rick
• Date: 01 April 1999

For the first time, the Tax Court upheld a 40% penalty against a taxpayer for substantially understating its taxable income due to a transfer pricing misstatement (DHL Corp., TC Memo 1998-461). Many practitioners believe this decision paves the way for the Service to routinely question controversial transfer pricing practices, including transfers of intangible assets outside the U.S.

Facts

DHL had developed and registered its trademark in the U.S., but its international affiliate (DHLI) had registered and defended the trademark in foreign countries. The foreign registrations had not claimed, however, that DHL was the trademark owner. The cost of developing the trademark had not been shared, and, based on written agreement and operating procedures, the parties had acknowledged that DHL owned and controlled the trademark. DHLI had not paid any consideration (payments or royalties) to DHL for using the trademark.

DHL and DHLI had recorded certain intercompany charges for services performed for each other, primarily for any imbalance between the values of shipments originating outside the...