Internal Revenue Service international examiners and economists will soon have an additional tool to help them select cases for audit, as U.S. multinationals later this year will begin to file a detailed reporting form with their tax returns.
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Whole Value Chain
Peter A. Barnes, a former tax counsel for General Electric Co. and a professor at Duke University School of Law, agreed that if a taxpayer shows significant income in a low-tax jurisdiction, with limited employees and limited physical assets, then the examiner can explore whether the taxpayer's operations in the examiner's home country are making payments to that low-taxed jurisdiction.
“Royalties? Interest? Service fees? The mere fact that payments are being made to the low-taxed jurisdiction does not mean there is abuse, but the examiner can focus good questions to the taxpayer,” he told Bloomberg BNA in an e-mail March 6.
Barnes said the reverse is also true—if an examiner sees that a taxpayer “has substantial operations—employees, assets—in his or her jurisdiction, but relatively little income,” the examiner can ask why.
Finally, if the taxpayer has significant operations in a nearby, low-tax jurisdiction—for example, Germany or Luxembourg—the examiner in the higher-tax jurisdiction can ask why, and what the relationship is between operations in the two countries.
Not a Game-Changer
Still, Barnes noted, examiners can already ask these kinds of questions. He said he saw the country-by-country report as a useful tool, but not a game-changer.
Transfer Pricing Adjustments?
Barnes said that any examiner—U.S. or foreign—that makes an assessment solely from the country-by-country report is abusing their authority. “I don't think that will happen,” said the professor, who is also of counsel with Caplin & Drysdale, Chartered.
Further, using information from country-by-country reports to make a transfer pricing adjustment would be risky for an auditor because the adjustment could be hard to support with information legitimately at the auditor's disposal.
“No examiner wants to waste time chasing an adjustment that will not stand up,” Barnes said.
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Excerpt taken from the article “Reporting Form Gives IRS Auditors New Lens for U.S. Groups” by Kevin A. Bell for Daily Tax Report.