Renewed Emphasis By Internal Revenue Service in Auditing International Concerns and Policing Transfer Pricing Requirements
We are on notice that a significant increase in the number of transfer pricing examinations will be initiated by the IRS, both inbound and outbound. It is also expected that the Service will be asserting more frequently additions to tax under section 6662(e) for faulty transfer pricing practices. Taxpayers can expect additional penalty assertions, even if they have contemporaneous documentation. On the treaty side, Competent Authority personnel are increasingly available to field examiners to make sure that the proper documentation is provided and work on a coordinated basis in negotiating issues with foreign governments. Also expect a up-tick in information sharing with tax treaty countries. In this regard, it is reported that the process for IRS examiners to obtain information from foreign jurisdictions has been significantly streamlined, which has resulted in increased activity. Moreover, as recently mentioned in this blog, the United States is also working on a protocol to conduct joint audits with some U.S. tax treaty partners.
The IRS has recently announced that it will continue to emphasize transfer pricing issues as a key element in its efforts to foster international tax compliance. It is obvious that such renewed vigor is required due to the enormous and continuing growth in foreign based operations and foreign source income realized by U.S. multinational corporations. A second problem area is the continuation of efforts by taxpayers to engage in earnings stripping strategies employed by foreign based companies doing business in the United States. Some of these strategies violate arms length pricing standards and are in certain instances abusive and unsupportable on any level, particularly in the financing area. A third trend is the aggressive approach taken by some taxpayers who are residents of countries in which the U.S. has a tax treaty. To meet these challenges the IRS has embarked on a program of increasing LMSB staffing, selecting transfer pricing issue specialists, expand the number of economists in LMSB, and form a new LMSB transfer pricing practice, i.e, a nationwide group of transfer pricing experts. Thus, transfer pricing, together with withholding taxes and treatment of hybrid entities will be key facets of the international tax compliance initiatives of Commissioner Shulman.
