ALERT: More and More Transfer Pricing Enforcement in Store!

by Patricia Gimbel Lewis, John M. Breen, H. David Rosenbloom, Neal M. Kochman

Recognizing the inexorable globalization of business and underscoring the high priority that top management places on international tax compliance, the IRS just announced a realignment of its Large and Mid-Size Business (LMSB) division into a new Large Business and International division (LB&I) [See IRS press release]. In its words, this will "create a more centralized organization dedicated to improving international tax compliance." The number of employees in the current International Program (previously under the LMSB Deputy Commissioner, International) will be more than doubled, by bringing in examiners, economists and technical staff who work on international issues in other parts of LMSB.

Per the IRS, some of the enhancements enabled by the realignment include:

  • Identifying emerging international compliance issues more quickly
  • Removing geographic barriers so as to facilitate dedication of efforts to the most pressing international issues
  • Increasing international specialization among IRS staff
  • Allocating the right compliance resources to the right cases
  • Consolidating oversight of international information reporting and implementing new programs such as FATCA
  • Coordinating Competent Authority more closely with originating field personnel, especially in transfer pricing matters

Notably, there will be a transfer pricing director, who will handle the recently established "Transfer Pricing Practice" within LMSB [see Caplin & Drysdale Alert on May 5, 2010], and a chief economist, who will oversee economic positions pertaining to transfer pricing. Consistent with recent trends, the planned IRS realignment will be "virtual" in nature, with little or no physical relocation of personnel. While not mentioned in the IRS press release, the IRS Appeals Office recently strengthened its own International Program, consolidating and sharpening its expertise in international matters, including transfer pricing.

The individuals who will serve in the two new transfer pricing positions have not yet been publicly named. The current LMSB Commissioner (Heather C. Maloy) and Deputy Commissioner, International (Michael Danilack), will continue in equivalent positions in the new LB&I division.

This focused restructuring, together with organization of the new Transfer Pricing Practice and its pilot enforcement program, unequivocally signals an intensified emphasis (if not dragnet) on transfer pricing examination and enforcement. Informally, one of the goals of the reorganization is to eliminate bureaucratic "silos" that sometimes prevented assignment of the most capable IRS analysts and reviewers to high-value transfer pricing cases. Taxpayers are clearly on notice to buckle down and get their transfer pricing houses in order! This should include a review of transfer pricing studies for all significant related-party cross-border transactions to be sure they are in place, thoughtful and up-to-date. It is an ideal time to consider entering into Advance Pricing Agreements with the IRS and treaty partners to eliminate transfer pricing exposure. APAs are also highly desirable from the perspective of FIN 48 accounting disclosure rules as well as the impending IRS Uncertain Tax Position (UTP) tax return forms (expected to be in place for 2010 returns).

The IRS move comes on the heels of a July 22 House Ways and Means Committee hearing on transfer pricing, accompanied by an extensive report from the Joint Committee on Taxation entitled "Present Law and Background Related to Possible Income Shifting and Transfer Pricing". The report explored in detail six real (but sanitized) cases of large U.S. multinational companies with exceptionally low global effective tax rates, implicitly enabled by various transfer pricing structures. Most involved "stripped" affiliates and/or transfers of valuable intangibles. There is no doubt that these types of situations are on the radar screen of lawmakers, although the likelihood of near-term legislative changes is unclear. Various proposals are floating around, including major intangibles-related proposals in the Administration's FY 2010 budget. Stimulation of IRS enforcement of existing rules is another, or parallel, consequence. As Willie Sutton said, . . . .

If we can be of assistance in helping you assess transfer pricing compliance issues or deal with IRS examinations, Appeals, APAs or intergovernmental Competent Authority matters, please contact one of our transfer pricing group members below. We work together with independent economic consultants and accounting firms as well as foreign practitioners to provide comprehensive service on global transfer pricing matters.

Patricia Gimbel Lewis' practice currently focuses on international transfer pricing issues, competent authority matters, and other aspects of international taxation. This includes tax planning advice on compliance with U.S. and foreign transfer pricing rules in connection with ongoing business operations or business transactions, as well as assistance in the event of tax audits and other administrative controversies. A particular emphasis is the negotiation of advance pricing agreements (APAs) between taxpayers, the IRS, and foreign tax authorities.

John M. Breen's practice focuses on international tax issues involving transfer pricing planning and controversies. He has participated in Advance Pricing Agreement proceedings and Competent Authority proceedings involving transfer pricing and related matters.

H. David Rosenbloom's major areas of practice include international tax planning and controversies, including transfer pricing and advance pricing agreements, the foreign tax credit and subpart F, tax treaty issues and competent authority proceedings, financial products and financial institutions, taxation of all forms of inbound investment, and individual tax compliance in a cross-border context.

Neal M. Kochman's practice focuses on international tax planning, taxation of settlements, and bankruptcy tax matters. His experience covers a broad range of international, domestic, and state tax issues associated with transfer pricing, foreign tax credit planning, corporate restructurings, qualified settlement funds, and withholding and reporting.

Patricia Gimbel Lewis at 202-862-5017 or pgl@capdale.com
John Breen at 202-862-7854 or jb@capdale.com
H. David Rosenbloom at 202-862-5037 or hdr@capdale.com
Neal M. Kochman at 202-862-5024 or nmk@capdale.com

To view our Transfer Pricing Brochure, click here


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