IRS Contemplating Increased Scrutiny of U.S. Inbound Transfer Pricing

IRS Contemplating Increased Scrutiny of U.S. Inbound Transfer Pricing

14th October 2011

by Chuck Merriman

At a recent conference, a senior U.S. Internal Revenue Service ("IRS") official stated that the United States government should place even greater emphasis on challenging the transfer pricing for U.S. inbound related party transactions. This proposed increase in scrutiny of U.S. inbound transactions is ostensibly meant to level the playing field with respect to the tactics being employed by non-U.S. governments to raise tax revenues through adjusting the transfer pricing of transactions entered into by U.S. multinational an their off-shore operations.

In these days of high government debt and deficit levels, it is certainly no surprise that the tax authorities of any given country will attempt to grab as much tax revenue as possible, particularly from non-contituents. The U.S. has always lead the way internationally when it comes to implementing measures to prevent the erosion of its income tax base by non-U.S. persons, even when some of those measures were criticised by trading partners as overriding U.S. income tax treaties. U.S efforts to preserve tax revenue began with, for example , the branch profits and earnings stripping rules in the 1980's, and has continued since then with the conduit finance, hybrid entity and anti-inversion rules, as well as the killer "B" transaction regulations, limitation on benefits provisions in the U.S. tax treaties, repeal of the 80/20 company rules, changed to sourcing of swap payments, expanded inbound investment reporting requirements and significantly increased penalties.

Based on recent experience I have had with the IRS in a U.S. Tax Court case, the IRS continues to aggressively challenge U.S. inbound transactions, whether or not related to transfer pricing. Given the need for the U.S. Government to raise tax revenue, the IRS official's comments regarding transfer pricing are not surprising. Also, if the U.S. adopts a "territorial" income tax regime as part of a tax reform, there will be a greater focus on both sourcing of income and deductions and transfer pricing. Make sure your house is in order.

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Contact details:

Chuck Merriman - Merriman Capital Transactions Ltd.

Second Floor, Berkley Square House, Berkley Square, London, W1J 6BD

cmerriman@merrimantransactions.com

t +44 (0) 20 7887 1442

Obama Administration Plan for Economic Growth and Deficit Reduction

Obama Administration Plan for Economic Growth and Deficit Reduction

23rd September 2011

by Chuck Merriman

U.S Transaction Planning Insights:

The Obama Administration released its Plan for Economic Growth and Deficit Reduction ("the plan") earlier this week, The Plan includes a number of revenue raising measures including, measures proposed in the American Jobs act (the "Act") published last week.

The Act includes inter alia a revenue raising measure to tax income of investment fund manager earned from "carries interest" as ordinary income (35 per cent tax rate), instead of being taxed as a capital gain (15 per cent tax rate). This measure was proposed earlier last year and was rejected by Republicans in Congress. The Plan includes inter alia provisions to "reform" certain elements of the U.S. international tax system. All but one of the proposed international tax law changes in The Plan would impact "outbound" transactions and operations of U.S. multinational groups. In brief, the outbound international tax law changes include rules to defer U.S. interest deductions until income that has been deferred off-shore has been repatriated, compute deemed foreign tax credits on a "pooling" basis, and tax "excess returns" from intangible assets transferred off-shore as Subpart F income of a controlled foreign corporation, or CFC. The only other international tax law change would impact "inbound" U.S. related party financing, and potentially restrict U.S. interest deductions by tightening the "earnings stripping" rules for U.S. multinational groups that have expatriated or "flipped" their ultimate parent company, out of the United States.

The international tax reforms in The Plan are not new and have been included in Obama Administration budgets the past two years. Also, the proposals don't really, in substance, constitute international tax "reform", at least as I would expect true international tax reform to look. Instead, the proposals are probably better described as ad hoc revenue raisers. At this time, its seems unlikely that the international tax provisions in The Plan, or the carries interest provision Act, will be adopted given the current political climate in the United States.

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Contact details:

Chuck Merriman - Merriman Capital Transactions Ltd.

Second Floor, Berkley Square House, Berkley Square, London, W1J 6BD

cmerriman@merrimantransactions.com

t +44 (0) 20 7887 1442

Private Equity: Hyperinflation and strong, suitable financial management.

Private Equity: Hyperinflation and strong, suitable financial management.

London, 4th October 2011

by Matthew Leedham

August 2011 has been widely recognised as the worth month for high-street sales in two years, particularly within the apparel and homewares segments. With the retail sector being one traditionally favoured by private equity, there are further concerns as to the performance of such investments in light of retreating profitability.

This is in large part driven by rising materials and logistics costs and poor FX rates. This is compounded by a Lewisian turning point on labour costs, where the supply of surplus labour tightens and job market contracts and wedges subsequently rise.

This has been most recently seen on costal industrial China, where the cost of staff has risen to the extent that international businesses have relocated inshore, including Honda and Intel or to Vietnam and other lesser-developed economies.

These global hyper-inflationary effects are clearly playing substantial roles in the sector, and with many UK retailers unable to increase prices for fear of an elastic demand, how can PE ensure their portfolio business grow to an 'exitable' level?

it occurs to us that at Maven Partners that there has never before been such a need for highly skilled Finance Directors within the consumer sectors. These teams need to boast strong supply chain strategy and management, whilst also looking to potentially upscale higher margin online offerings and potentially downsize physical locations.

Therefore Finance Directors that have online experience and an ability to leverage disruptive business models (and where suitable, strong finance teams, that understand transfer pricing and international revenue recognition) will become increasingly vital.

If you would like a conversation regarding expertise we would be delighted to help. Maven is a very well networked with individuals across many sectors and has significant experience of dealing with such situations.

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Contact details:

Matthew Leedham PARTNER
t +44 (0) 20 3178 8849
m +44 (0) 7787 574 244

The Wire... An Introduction

The Wire... An Introduction

London, 6th October 2011

by James Rodgers

Despite current wider adverse macro economic conditions the Tax Recruitment Market both in London and Internationally is in "reasonable shape" all things considered, with good level amounts of activity in most sectors. This was particularly evident in Q1, Q2 and early Q3 of 2011 where the Profession (Big 4 notably) and the "bulge bracket" banks were hiring at a variety of levels both strategically and to bolster teams in volumes not seen since the collapse of Lehman's. The Commerce and Industry sector broadly has been slower to bounce back but is now enjoying increased levels of recruitment again at most levels (possibly with the exception of the Head of Tax level). Indeed, throughout this period there has been a consistent demand for specialist Tax Professionals in Transfer Pricing, VAT and Expat Tax for example and we can see this continuing till the end of the year and into 2012.

However, we are seeing a "cooling off" period now particularly in the Profession and FS given the current state of the U.S. economy, the "eurozone" debt crisis and the overall adverse effect this is having on the markets generally. Confidence is waning and as always recruitment is one of the first sectors to be hit despite more and more business posting good profits both as a result of increasing revenues but also from achieving greater efficiencies over the last three years.

Nevertheless, Maven Partners has continued to grow throughout 2011, with eleven Mavens now on board and more in the pipeline! Each person in our business adds something unique to the culture and with every new hire our culture continues to evolve positively. However, as with any good team there are common characteristics and ideals that run through the heart of it. In our case, a passion for our work, a desire to achieve the best results, innovative and creative methods, sharing exceptional knowledge and experience, all managed in a culture of absolute integrity and transparacy. Nothing overly new about this some might say but we stand by these principles and deliver on them!

Indeed, in sharing our knowledge and experience, we wanted to bring our client and candidate base to our views on what is happening in the market in terms of trends, individual moves, general conditions and some interesting "tit bits" of info as well.

In next months "The Wire":

• Key moves in the Profession and "In House"
• Is the interim market slowing as confidence returns further to hire permanent staff?
• The hardest Crossword in the world!

Contact details:

James Rodgers ASSOCIATE PARTNER
t +44 (0) 20 3178 8852
m +44 (0) 7841 801 401