The Eighth Circuit’s decision in 3M Co. v. Commissioner has officially joined the ranks of cases that every transfer pricing practitioner will be citing for years to come.
At its heart, this case asks a surprisingly fundamental question: Can the IRS tax income that a company was legally prohibited from receiving? In 3M’s case, Brazil said “no,” and the Eighth Circuit agreed.
A Quick Refresher: What Happened
3M’s Brazilian subsidiary licensed intangible property from its U.S. parent under a 2006 agreement. The problem? Brazilian law capped royalty payments to foreign related parties at 1% of sales.
The IRS, applying Section 482, decided that the arm’s-length royalty should have been 6%, and tried to reallocate an extra $23.7 million of “blocked” income to 3M U.S. The catch? 3M Brazil could not legally make those payments.
The Tax Court sided with the IRS in a narrow 9-8 decision in 2023, but on appeal, the Eighth Circuit reversed. The court ruled that you cannot “clearly reflect income” by taxing something that cannot legally be earned.
Why It’s Bigger Than 3M
If you are a multinational with subsidiaries in countries such as Brazil, India, or China, where remittance restrictions and royalty caps exist, this case matters.
The court reaffirmed that arm’s-length pricing must reflect economic and legal reality. And in a post-Loper Bright world, where courts no longer defer to agency interpretations, the IRS cannot rely on its own regulations when they overstep the statute.
The 3M decision reminds us that the true arm’s length standard lives in the world of what is economically and legally possible, not in a hypothetical world where local law does not exist.
Meanwhile, at the IRS…
Earlier this year, the IRS Office of Chief Counsel issued GLAM 2025-001, offering a new interpretation of the commensurate-with-income (CWI) standard. The guidance takes an aggressive stance, allowing the IRS to use ex-post profit data to justify adjustments, rather than relying solely on ex-ante projections available when the transaction was priced.
So, while courts are narrowing the IRS’s reach, the IRS is broadening its own. One side is emphasizing statutory limits and realism, while the other is pushing for greater administrative flexibility.
What It Means for Multinationals
For companies, this creates both uncertainty and opportunity. The 3M ruling limits IRS authority where foreign law restricts payments, but GLAM 2025-001 signals renewed scrutiny of intangible arrangements based on hindsight.
Practically speaking, this means documentation and planning matter more than ever. Contemporaneous documentation must tell a full story: it should capture the economic logic of your pricing decisions and the legal environment in which your subsidiaries operate.
It is not enough to benchmark the right comparables. Multinationals need to evaluate country-specific legal constraints as comparability factors that materially influence what is truly arm’s-length.
The Bigger Picture: Technology, Transparency, and Trust
At Exactera, we believe that transfer pricing should live in the real world of economics, data, and law. The 3M decision reinforces why technology and analytics must evolve alongside regulatory change. Our solutions help companies integrate both economic modeling and local legal considerations into their documentation, ensuring compliance that aligns with how courts now interpret Section 482.
When contemporaneous documentation reflects the real economic and legal context, it not only supports audit readiness but builds trust and transparency across global operations.
My Takeaway
If 3M teaches us anything, it is that transfer pricing has to reflect both economic and legal realities. You cannot price solely on a global scale, and you cannot document something after the fact.
And while we may not have all the answers yet, one thing remains certain: change in transfer pricing is as predictable as ever. Which, of course, makes it the least predictable area of tax.
The 3M opinion is the latest reminder that transfer pricing isn’t just about numbers. It is about narratives, context, and a little bit of law, which is the kind of complexity that keeps us on our toes and, honestly, makes this work fascinating.