An early effect of the U.S. Tax Cuts and Jobs Act was a significant reduction in U.S. tax revenues from corporations (as well as individuals), as corporations saw their tax rates decrease from 35 percent to 21 percent for the 2018 tax year. In fact, 2018 corporate income tax revenue fell by $92 billion from 2017—a 31 percent year-over-year decrease. To mitigate the effects of the reduced tax rate on its tax revenues, the IRS is heavily focusing on maintaining its tax base, i.e., U.S. sourced income.
For multinational entities (MNE), transfer pricing is the primary means of ensuring that profits are appropriately allocated among the countries where the company conducts business. Despite a series of high-profile losses related to transfer pricing in tax court, IRS Commissioner Charles Rettig reaffirmed his commitment to pursuing transfer pricing-related cases during an April 1 speech at a Tax Executives Institute conference in Washington, D.C. Rettig stated, “This is not a commissioner who believes that the IRS loses because a judge rules against us in a transfer pricing case. It’s a commissioner who thinks the IRS loses if it doesn’t keep bringing those cases.”
MNEs should remain vigilant in documenting their transfer pricing positions, including international cross-border transactions, as well as U.S. domestic transactions between not-for-profit and for-profit entities, which also can lead to reductions in U.S. tax revenues. For more information, contact Jason or your trusted BKD advisor.