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.
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
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