Foreign legal restrictions have often confused multinational taxpayers, particularly in countries like Brazil, whose transfer pricing regulations seemingly depart from the arm’s-length principle by capping royalties and setting ranges for tangible transfers. This has spurred controversy between taxpayers and the Internal Revenue Service regarding the impact of foreign legal restrictions on the arm’s-length amount to be recognized in controlled transactions. On Feb. 9, 2023, the tax court sided with the IRS in 3M Co. vs. Commissioner, upholding requirements in Treas. Reg. Sec. 1.482-1(h)(2) regarding when a taxpayer may consider foreign legal restrictions for determining the arm’s-length amount in a transaction between controlled taxpayers.