November 25, 2020

Wait No Longer, the Other Shoe Won’t Drop in Denmark

November 25, 2020/ Ruchelman P.L.L.C.

It seems in the world of transfer pricing litigation, a pattern of mutual expectations has emerged. Companies expect tax authorities to take revenue-maximizing positions and expect courts see the issue more clearly and vacate or substantially vary the assessment of the tax authority. At the same time, tax authorities expect that courts will uphold audit findings of material transfer pricing income adjustments using methods and data overlooked or ignored by companies. In October, the Danish Tax Agency received a decision from the Western High Court concerning an appeal originating from a transfer pricing audit commenced in 2006. Michael Peggs explains the reasons for the 14-year marathon and ponders whether transfer pricing norms in a post-B.E.P.S. world will put an end to this type of examination.

November 20, 2019

How Soon Is Now? The O.E.C.D. Starts Work on a Substitute for Unilateral Digital Economy Fixes

November 20, 2019/ Ruchelman P.L.L.C.

As of November 2019, the arm’s length principle continues to operate among the O.E.C.D. Member States. In a little more than a year, this may be different. The O.E.C.D.’s workplan for urgent policy development will investigate a new nexus standard that departs from the arm’s length principle applied for decades. In his article, Michael Peggs explains the current debate between tax administrations concerning the attribution of profit to digital or non-physical P.E.’s and the three popular approaches that have been proposed. The mood in the O.E.C.D. is that markets matter most under each of the suggested approaches. Brainpower and manufacturing prowess are less important.

November 30, 2016

European Commission Rocking the Boat at Arm's Length

November 30, 2016/ Ruchelman P.L.L.C.

This month, transfer pricing economists Theo Elshof, Olaf Smits, and Mark van Mil of Quantera Global, Amsterdam, explore the European Commission’s definition of the term “arm’s length” in recent State Aid cases. Tax advisers with experience in transfer pricing matters will be surprised to find that reliance on practices of global competitors in the same or similar industry is not relevant when the matter relates to tax rulings comprising State Aid.

January 15, 2016

International Practice Unit: License of Intangible Property from U.S. Parent to a Foreign Subsidiary

January 15, 2016/ Web Admin

Christine Long explains how I.R.S. examiners are encouraged to determine whether foreign subsidiaries are paying fair compensation for using I.P. owned by U.S. parent companies.

January 15, 2016

Taxpayers Take Note: I.R.S. Publishes Audit Guides for International Examiners

January 15, 2016/ Web Admin

U.S.-based companies facing an I.R.S. examination of international operations may secretly wish to obtain an advance look at how I.R.S. examiners plan to carry out the examination. After all, what better way to prepare for a test than to get the questions in advance? Surprise – the Large Business & International (LB&I) Division of the I.R.S. has published its training guides for examiners.

LB&I is responsible for examining tax returns reporting international transactions, and it is in the process of revising the method by which returns are chosen for examination and the the process by which those examinations are conducted. Several aspects of the guidance will be addressed through out this edition of Insights. Stanley C. Ruchelman explains.

August 15, 2015

Artificial Loan Restructurings

August 15, 2015/ Web Admin

The I.R.S. has discovered that related taxpayers have been renegotiating existing intercompany loans to allow operating companies within the group to pay a higher rate of interest to a related party benefitting from favorable tax attributes without violating Code §482 principles. Andrew P. Mitchel and Sheryl Shah explain how the I.R.S. is taking aim at this new approach to self-help.

August 15, 2015

Tax Court Strikes Down I.R.S. Position on Stock-Based Compensation in Altera Case

August 15, 2015/ Web Admin

Is the Altera case important because it struck down the I.R.S.’s stock-based compensation regulations related to cost sharing agreements? Or is it important because of the procedural analysis, which enabled the Tax Court to be in position to strike down a regulation? Beate Erwin, Stanley C. Ruchelman, and Michael Peggs explain why the case is important for both reasons.

February 15, 2015

Transfer Pricing Litigation from A to Z

February 15, 2015/ Web Admin

A number of transfer pricing cases, many with potentially significant precedent value and tax provision consequences, are either at trial or proceeding to trial. Michael Peggs and Cheryl Magat comment on two of the major cases on the Tax Court Docket, Altera and Zimmer. Those who think arm’s length means “do what others do” will be surprised.

January 15, 2015

B.E.P.S. Actions 8, 9 & 10: Assuring that Transfer Pricing Outcomes are in Line with Value Creation

January 15, 2015/ Web Admin

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On December 19, 2014, the Organisation of Economic Co-operation and Development (“O.E.C.D.”) released a discussion draft on Actions 8, 9, and 10 of the Base Erosion and Profit Shifting (“B.E.P.S.”) Action Plan (“Discussion Draft” or “Draft”). Actions 8, 9, and 10 reinforce the goal of assuring that transfer pricing outcomes are in line with value creation.

In July 2013, the O.E.C.D. published the B.E.P.S. Action Plan for the purpose of establishing a comprehensive agenda to resolve B.E.P.S. issues. The B.E.P.S. Action Plan identifies 15 actions to combat B.E.P.S. and establishes deadlines for application of each action.

The Discussion Draft introduces revisions to Chapter I of the Transfer Pricing Guidelines and addresses the related topics in Actions 8, 9, and 10. Specifically, the Discussion Draft focuses on the development of the following:

(i) rules to prevent B.E.P.S. by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation.

(ii) rules to prevent B.E.P.S. by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterized.

(iii) transfer pricing rules or special measures for transfers of hard-to-value intangibles.

August 15, 2014

Tax 101: Tax Planning and Compliance for Foreign Businesses with U.S. Activity

August 15, 2014/ Web Admin

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I. INTRODUCTION

The U.S. tax laws affecting foreign businesses with activity in the U.S. contain some of the more complex provisions of the Internal Revenue Code. Examples include:

Effectively connected income,
Allocation of expenses to that income,
Income tax treaties,
Arm’s length transfer pricing rules,
Permanent establishments under income tax treaties,
Limitation on benefits provisions in income tax treaties that are designed to prevent “treaty shopping,”
State tax apportionment,
F.I.R.P.T.A. withholding tax for transactions categorized as real property transfers,
Fixed and determinable annual and periodical income, and
Interest on items of portfolio debt.

One can imagine that it is no easy task to identify income that is subject to tax, to identify the tax regime applicable to the income, and to quantify gross income, net income, and income subject to withholding tax. Nonetheless, the I.R.S. has identified withholding tax obligations of U.S. payers as a Tier I audit issue.

August 15, 2014

U.S.-Based Pushback on B.E.P.S.

August 15, 2014/ Web Admin

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INTRODUCTION

In addition to the aggressive actions by some foreign countries to levy more taxes on U.S. taxpayers before a consensus has been reached, the process established by the O.E.C.D. raises serious questions about the ability of the United States to fully participate in the negotiations.

Ultimately, we believe that the best way for the United States to address the potential problem of B.E.P.S. is to enact comprehensive tax reforms that lower the corporate rate to a more internationally competitive level and modernize the badly outdated and uncompetitive U.S. international tax structure.

So say Representative Dave Camp (R) and Senator Orrin Hatch (R), two leading Republican voices in Congress, on the O.E.C.D.’s B.E.P.S. project.

Does this somewhat direct expression of skepticism represent nothing more than U.S. political party politicking or a unified U.S. government position that in fact might be one supported by U.S. multinational corporations? The thought of the two political parties, the Administration and U.S. industry agreeing on a major political/economic issue presents an interesting, if unlikely, scenario. This article will explore that scenario.

OVERVIEW OF B.E.P.S./WHY B.E.P.S.?/WHY NOW?

Base erosion and profit shifting (“B.E.P.S.”) refers to tax planning strategies that exploit gaps and mismatches in tax rules in order to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity and the taxes are low. This results in little or no overall corporate tax being paid.