Industry Insights

Transfer Pricing Update

June 2012
Author:  Will James

Will James

Partner

International Services

Manufacturing & Distribution

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Transfer pricing is now a regular topic in the mainstream press. Recent articles about the reorganization of the IRS international tax team and Google’s extraordinarily low tax rate have brought transfer pricing into the national spotlight.

A Forbes article uses a clever analogy to the 1980s TV show “The A-Team” to highlight the top international tax talent the IRS has recruited to lead the newly created Large Business & International (LB&I) Division. Congress has tasked the LB&I with cracking down on perceived transfer pricing abuses by multinational enterprises. With particular regard to transfer pricing, the IRS hired Sam Maruca to serve as transfer pricing director. Maruca will report directly to Michael Danilack, the deputy commissioner (International). The Advanced Pricing Agreement program and competent authority program were recently merged under new hire Richard McAlonan. 

Recent articles about Google and Apple express outrage at the companies’ low overall effective tax rates, which were reportedly 2.4 percent and 9.8 percent, respectively. Google supposedly achieved its low tax rate through use of tax structures known as the “Double Irish” and “Dutch Sandwich.” The articles intimate that these structures, while legal, were the means to facilitate overly aggressive transfer pricing practices.

This article from Reuters and others demonstrate the IRS’ willingness to aggressively pursue transfer pricing adjustments and demonstrate public sentiment against perceived tax abuses by multinational corporations. 

Transfer Pricing Software Solution Provider at the Center of Court Controversy

In Microsoft Corp. v. District of Columbia Office of Tax and Revenue, an administrative law judge ruled that the District of Columbia Office of Tax and Revenue’s (OTR) third-party contractor, Chainbridge Software LLC, did not correctly apply federal transfer pricing rules under Section 482. As a result, the judge overturned a $2.75 million assessment against Microsoft.

Several nonunitary states have hired Chainbridge as a contractor on a contingent fee basis to locate potential transfer pricing adjustments. Its analyses, produced using a software program, have been criticized by taxpayers and transfer pricing practitioners, as they are perceived to misapply the Comparable Profits Method by incorrectly aggregating related and unrelated transactions. Even though the OTR lost the case, it has no intentions of altering its approach or severing its relationship with Chainbridge. This case demonstrates states’ willingness to seek transfer pricing adjustments using methodologies that may not conform with federal transfer pricing regulations.

China Nets Significant Tax Revenues Through Transfer Pricing Enforcement

According to a February 24, 2012, article in China Tax News, the State Administration of Taxation (SAT) netted RMB 23.9 billion (approximately U.S. $3.8 billion) in transfer pricing adjustments in 2011. This includes RMB 20.8 billion related to “management aspects of income,” known as administration income, where a taxpayer willingly adjusts its transfer pricing. These situations often occur when the taxpayer is under audit. RMB 700 million of the total pertains to “the areas of services income” or services income that includes advance pricing agreements and mutual agreement procedures. The remaining RMB 2.4 billion was derived from investigations. According to the Bureau of National Affairs, this was a 240 percent increase from 2010.

China Taxation News said the SAT will continue to focus its transfer pricing inquiries in automotive, retail, real estate, shipping and freight forwarding sectors.  

For more information on transfer pricing or other international tax issues, contact your BKD advisor.

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