Section 482

Definition

Section 482 is a clause of the U.S. Internal Revenue Code that empowers the Treasury Department to allocate income and expenses among related entities

What is Section 482?

The cornerstone of Section 482 is the arm’s length principle, which requires that transactions between related parties be priced as if they were negotiated between unrelated parties under similar circumstances. In other words, the prices or terms of related-party transactions should be comparable to those that would prevail in a similar transaction between unrelated parties. By adjusting the prices or terms of these transactions, Section 482 aims to ensure that related entities report taxable income accurately and reflect economic substance.

Section 482 applies to a wide range of transactions between related parties, including the transfer of tangible goods, intangible property, services, loans, and other financial arrangements. It covers both domestic and international transactions involving U.S.-based entities and their foreign partners.

Taxpayers subject to Section 482 are required to maintain documentation supporting the prices or terms of related-party transactions, including documentation of comparable transactions, economic analyses, and other relevant information. Failure to comply with documentation requirements can result in penalties and increased inspection by tax authorities.

The IRS has authority to enforce Section 482, and if it determines that related-party transactions do not comply with the arm’s length standard, it may make appropriate adjustments to allocate income or expenses among the entities involved. Penalties for non-compliance with Section 482 can include fines, interest, and other sanctions.

Example of Section 482

ABC Corporation, a U.S.-based multinational company, has a subsidiary located in Country X. The subsidiary manufactures components that it sells to ABC Corporation for use in its products. To ensure compliance with Section 482, ABC Corporation conducts a thorough analysis of comparable transactions in the open market to determine the appropriate transfer price for the components, ensuring compliance with Section 482 and avoiding potential tax implications.