INTERNATIONAL TAX AND TRANSFER PRICING RESET
By Steven D. Felgran
The days of tax opportunism are rapidly coming to an end. Although corporate inversions remain in the news and one still hears about aggressive tax avoidance, in fact the worldwide crackdown on multinationals’ tax structures is here now.
The burden on multinationals to comply with new requirements and defend their tax structures will likely be enormous.
The OECD’s project to counter base erosion and profit shifting through tax transparency has produced demanding country-by-country (“CbyC”) reporting requirements and new standards for assessing harmful tax practices. The new CbyC reports require that multinationals provide revenue, profit/loss, capital, and accumulated earnings for each country of operation.
The European Commission has ordered certain multinationals to repay funds from tax rulings it deems constitute “illegal state aid” by EU member states such as the Netherlands and Luxembourg.
The U.K. has a new diverted profits tax, dubbed the “Google tax”, which became law amidst concerns that multinationals were shifting profits to tax havens. This law permits the government to levy a higher corporate tax rate on any profits it deems were improperly shifted from the U.K. Google, like many successful global companies, avoided billions in tax using intercompany contracts to shift taxable income (in Google’s case, to Bermuda).
The U.S. has witnessed a surge in IRS court actions against multinationals for various alleged tax and transfer pricing abuses. In such cases, the IRS issues a notice of tax deficiency against the company, with millions or sometimes billions at stake. If the IRS designates the case for litigation, the company is blocked from obtaining an administrative settlement (e.g., through Appeals) and will almost certainly wind up in U.S. Tax Court, although it might have wound up there anyway. Many court matters concern the ownership, development and/or migration of intangibles and appropriate compensation.
It remains fine to be tax efficient provided profits are earned where value is created and a fair share of taxes is paid at each location consistent with economic substance. However, the environment is such that all multinationals, including those with conservative tax postures, may now have to deal with the increased risk of tax audit and litigation.
To be prepared, multinationals should first reverse any positions that are overly aggressive and be certain that intercompany contracts are aligned with actual conduct at each location (and move people if necessary). Multinationals should create systems to generate required data for the CbyC reports and make sure they can meet all other regulatory requirements. Multinationals should be forthright with the tax authorities at the outset of an audit and put their best argument forward pro-actively. Finally, multinationals might consider boosting their tax contingency reserves.
|Steven D. Felgran is a director in the Financial Advisory Services practice at AlixPartners, LLP, and leader of its North American transfer pricing practice.
The opinions expressed are those of the author and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its or their respective other professionals or clients.
 Bloomberg BNA, 24 Transfer Pricing Report 1263, February 18, 2016.
EDITOR’S NOTE: NETWORK Magazine’s 2016 issue, Volume 2 credited Bill Sweeney with the authorship of the article above. This article was written exclusively by Steven D. Felgran, Director, Financial Advisory Services with AlixPartners, LLP.