In the second quarter, Edwards Lifesciences (EW), a manufacturer of medical devices that treat heart disease, received a Notice of Proposed Adjustment (NOPA) from the IRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/ Transcatheter Aortic Valve Replacement (TAVR) intercompany royalty transactions between the company's U.S. and Switzerland subsidiaries.

The IRS, according to filings, believes Edwards owes an additional $200 million over the tax years in question. In its latest 10-Q, Edwards revealed it convinced the IRS to reduce the adjustment by $20 million:

“During the third quarter of 2021, the Company completed its review of the NOPA and provided comments to the IRS and the IRS subsequently revised the NOPA. The revised NOPA proposes an increase to the Company's U.S. taxable income which could result in additional tax expense for this period of approximately $180 million and represents a significant change to previously agreed upon transfer pricing methodologies for these types of transactions.”

The adjustment, if Edward’s ultimately pays it, is the equivalent of 4.1% of the company’s 2020 sales and 21.8% of net income. Edward’s is not the first company to accuse the IRS of straying from previously agreed upon transfer pricing methodologies. In April, we similarly warned Coca-Cola (KO) may owe the IRS $12 billion in back taxes related to transfer pricing disagreements:

Edwards says it has also received the final Revenue Agent's Report for the tax years under scrutiny, which suggests the IRS is done negotiating. Edwards has filed a formal protest to the IRS Independent Office of Appeals and suggests it may be years before the matter is resolved.

Expect the matter to possibly worsen for Edwards as certain Surgical/TAVR intercompany royalty transactions for tax years 2015-2021 that were not resolved under its Advanced Pricing Program (APA)— which covers many but not all transfer pricing matters— remain subject to IRS examination.

The IRS dropped a not so subtle hint last year that increased transfer pricing scrutiny was on the horizon. In April 2020, the IRS issued guidance outlining best practices and common mistakes in preparing transfer pricing documentation.