by Brian Mahany
As the IRS gears up (again) to tackle perceived transfer pricing abuses, many multinational businesses are asking if they need worry. Although the IRS often packs more bark than bite, it appears the Service is getting serious this time. Unlike past initiatives, the IRS is reaching outside its ranks to recruit lawyers, economists and accountants from well known private sector companies. As we know, the usual progression is to leave public service in search of a better paying job outside government.
Section 482 of the Internal Revenue Code authorizes the IRS to adjust the income, deductions ,credits, or allowances of commonly controlled taxpayers to prevent evasion of taxes or to clearly reflect their income. The regulations under section 482 generally provide that prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, yield results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.
Congress passed this section to prevent companies from artificially manipulating prices to take advantage of more favorable tax treatment in other jurisdictions. That means a company can’t inflate internal costs to minimize profits in high tax countries.
Not only are transfer pricing audits usually quite complex, the time to complete those audits has also risen sharply. Open audits and unresolved transfer pricing issues are problematic for the business community. It’s hard to make pricing decisions and decide project workflows when audits can be open for many years.
The latest statistics released by the IRS in December of last year reveal the average time to close a case in the IRS’ Advance Pricing Agreement Program is 1226 days (3.5 years). The time to close a case through the traditional adversarial process is even longer.
The goal of the new initiative is faster turnaround, more consistency and insuring better litigation results for the IRS.
There are many transfer pricing examinations under way. As the new team of specialists gets up to speed, taxpayers can expect a tougher time when challenging audit findings.
If you have a business with significant cross border transfer pricing issues, give us a call. We can assist proactively as well as provide audit defense and appeals representation if necessary. Our tax attorneys have assisted a number of businesses with a full range of complex tax compliance issues*.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS services available worldwide.
* Mahany & Ertl is proud to announce we are the preferred legal services provider for the CPAmerica organization of accounting firms.