Talent in Demand as Transfer Pricing Disputes Gain Attention (Xlinx Ruling) - 29 June 2009

Talent in Demand as Transfer Pricing Disputes Gain Attention

Transfer pricing - complex arrangements companies use to allocate
costs and revenue between operations in different tax jurisdictions -
has steadily become one of the top concerns of the IRS. The agency was
recently handed a victory in a dispute with Xilinx that could have far
reaching implications for other multinational companies that use
transfer pricing.

In the decision, the U.S. Court of Appeals for the Ninth Circuit
reversed an August 2005 ruling by the U.S. Tax Court concerning
Xilinx’s cost-sharing agreement with its Irish subsidiary, Xilinx
Ireland, according to the WSJ.
The report states the dispute concerned a transfer-pricing arrangement
that Xilinx had set up in which it allocated part of its R&D costs
to the Irish subsidiary, but kept the entire value of its stock option
deductions for its R&D employees in the U.S. None of the deductions
were allocated to the subsidiary in Ireland, where corporate income-tax
rates are significantly lower than in the U.S., thus lowering Xilinx’s
global tax burden.

Transfer pricing is the pricing of goods and services, including raw
materials, products, and payments such as management fees and
intellectual property royalties, within a multi-divisional corporation.
Essentially, when one subsidiary sells goods or services to another
subsidiary in a different country, the price charged for these goods or
services is called the transfer price.

Since tax rates vary between countries, multinational corporations
can increase their profits with the help of transfer pricing. By
lowering prices in countries where tax rates are high and raising them
in countries with a lower tax rate, corporations can reduce their
overall tax burden and boost profits.

U.S. Treasury Department regulations, however, dictate that
multinational corporations conduct business between their subsidiaries
at “arm’s length.” That means all transactions between the subsidiaries
should be priced as if the transaction was conducted between two
unconnected parties.

Xilinx argued that unrelated companies wouldn’t have shared the
costs of the stock options. By a vote of 2-1, however, the appellate
court ruled that the costs related to the options had to be shared,
increasing Xilinx’s taxable income in the U.S., notes the WSJ.

The report adds the panel also held that a regulation limiting the
IRS to the arm’s length standard is in “irreconcilable” conflict with
another regulation that gives the IRS authority to decide how
R&D-type expenses should be allocated between corporate
subsidiaries. The WSJ concludes this could hand the IRS broad new
powers to adjust corporate tax returns.

The WSJ quotes H. David Rosenbloom, an international tax attorney at
Caplin & Drysdale, as saying, “It’s the most important
transfer-pricing decision in this country in 20 years. It goes to the
question of how broad the IRS’s power is.”

The Xilinx decision comes as the Obama administration is proposing a
tough new enforcement campaign directed at taxes owed both domestically
and abroad, according to tax-news.com.
Moreover, in his recent Fiscal Responsibility Summit, Obama discussed
the possibility of lowering the statutory corporate tax rate while also
closing tax loopholes that allow companies to reduce taxes, according
to WebCPA.

Congressional scrutiny of transfer pricing schemes has also ramped
up in recent years. And IRS Commissioner, Doug Shulman, has repeatedly
warned that the agency is ramping up efforts to police the U.S.
international tax system.

In a recent speech before the Organization for Economic Cooperation
and Development, Shulman noted that the stepped-up enforcement efforts
had led to a victory in last week’s Appeals Court ruling against chip
maker Xilinx, according to WebCPA. The report states that Shulman plans to require more enforcement of information-reporting requirements to catch tax evaders.

“While we won’t always agree about what the law is, or how it
applies in particular cases, we recognize that many businesses are
trying to get it right. However, we also know that some businesses use
the complexity of the Tax Code and the international capital markets to
push the envelope too far. That is where we have issues, and where we
will continue to focus,” Web CPA quotes Shulman as saying. The report
adds that particular areas of concern include financial instruments,
hybrid structures, withholding taxes and transfer pricing.

Today, transfer-pricing disputes between multinational companies and
the IRS are drawing increased attention as companies do more business

more...http://blog.aefeldman.com/2009/06/29/talent-in-demand-as-transfer-pricing-disputes-gain-attention/