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United States: Considerations for modifying or unwinding related-party transactions (COVID-19)

United States: Related-party transactions (COVID-19)

U.S. taxpayers with existing related-party transactions may want to consider adjusting or terminating certain related-party transactions that may not make economic or business sense, given the business climate resulting from the coronavirus (COVID-19) pandemic.


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The U.S. transfer pricing rules, based on the arm’s length principle, allow taxpayers to report arm’s length prices different than those originally charged, though this must be done on an original, timely return if it reduces U.S. taxable income.

Taxpayers that want to undo related-party transactions, rather than change prices, may be able to invoke the doctrine of rescission, under which a transaction may be disregarded if it is rescinded during the same year. When the rescission is done by mutual agreement and primarily benefits one related party, there are several issues that need to be addressed. However, the IRS has shown flexibility in dealing with such issues.

Rescission cannot be used to alter the results of transactions (e.g., to convert a dividend into a loan). Rather, rescission is restricted to unwinding the original transaction and restoring the parties to the status they occupied prior to the original transaction. However, in certain circumstances, the IRS has allowed taxpayers to unwind only a portion of the original transaction.

Taxpayers would need to exercise caution when considering rescinding a transaction and then entering into a new transaction that is substantively similar to, or meant as a substitute for, the first transaction. It is possible that the IRS would apply the step transaction doctrine to invalidate the rescission. However, the IRS has given effect to rescissions followed by substitute transactions in some cases.

Lastly, other jurisdictions may not respect a rescission or related-party adjustment. Whether such adjustments would be allowed will depend on the rules in the counterparty country.

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice:

Mark Martin | +1 713 319 3976 |

Sean Foley | +1 408 878 7430 |

Tom Zollo | +1 312 665 8387 |

Thomas Bettge | +1 713 319 2173 |

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