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Transfer Pricing Insights from IRS and Corporate Tax Executives

Transfer Pricing Insights from IRS and Corporate Tax Executives

Transfer pricing was a hot topic recently in Washington at GWU Law’s 30th Annual Institute on Current Issues in International Taxation. High-level IRS officials shared transfer pricing insights on the enforcement and challenges they are facing. Corporate tax executives were asked direct questions about the issues they are currently dealing with in their tax departments; not surprisingly, transfer pricing was at the forefront of much of their responses.

Kirsten Wielobob, IRS Deputy Commissioner for Services and Enforcement, and Douglas O’Donnell, Commissioner, Large Business and International Division (L&I Division) presented a high-level overview on hot tax topics with which they are dealing. Transfer pricing insights that they were able to share included:

  • Transfer pricing is one of the top three largest consumers of personnel time in the IRS LB&I Division.
  • IRS is taking a holistic view and approach to transfer pricing, focusing on data analytics to streamline how issues are identified, analyzed, and resolved.
  • IRS is currently struggling with transfer pricing legal cases, losing many of them. The IRS is clearly receiving the “not-so-subtle” messages from various court decisions.
  • Taxpayers can expect an announcement of changes in coming months, as the IRS cannot continue to operate in the same resource-constrained manner. The IRS will identify the impact of those changes, and any potential issues. Maximization of efforts and limited resources will entail the need to select the biggest issues to pursue.
  • IRS takes non-compliance of offshore structures seriously and uses every source possible in an effort to uncover such non-compliance, including leaked information from sources like the Paradise Papers.
  • IRS joined the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC), whereby 37 of the world’s national tax administrations have committed to more effective and efficient ways to deal with tax avoidance. This is a platform to identify, combat, and understand abusive tax avoidance transactions, arrangements, and schemes.

Tax executives from multinational enterprises (two Fortune 100 and two Fortune 500) were asked specific questions about their corporate tax departments and what keeps them up at night.

What Are Your Key Priorities As a Senior Tax Executive?

  • Create a competitive, sustainable, and low-risk profile that increases predictability and decreases surprises.
  • Deal with biggest uncertainty: transfer pricing. Are we allocating profits properly around the world? An aggressive Advance Pricing Agreement (“APA”) transfer pricing strategy increases predictability.
  • Navigating the uncertainty around tax reform and Brexit.
  • Building and managing a team of in-house tax professionals located in 30 countries, and dealing with taxes across many borders for foreign operations.

How Has Your Role Changed, Internally or Externally?

  • Tax has a seat at the table now, gets in early with business to help make decisions. There is increased visibility, but business reasons still ultimately drive decisions.
  • More frequent interactions with tax authorities, now more common that tax officials want to talk to businesses up front; proactive instead of reactive audit approach.
  • Increasing focus on streamlining processes and creating efficiencies, new technologies, and stretching resources and budgets to meet ever-increasing compliance demands.

Looking at Your Tax Department, What Are Some of Your Most Pressing Challenges?

  • Tax reform is the elephant in the room, and it needs to be determined immediately what changes and impact reform will have to the business.
  • New compliance requirements, leading with OECD/BEPS Country-by-Country Reporting (“CbC Reporting”), plus Master File, Local File, and notification of filing every year.
  • Need to have a quick response to investors and business, assessing tax impact if a new operational plan is proposed for the supply chain.
  • Talent acquisition around the world. Shift toward diversity of skill, where tax technical resources now need IT knowledge or business knowledge as well. Transfer pricing is a factor, it is great to have transfer pricing people who understand the business, help communicate tax to the business.

What Does “Transparency” Mean to You?

  • All information now captured globally every year with CbC Reporting, everything will now be public and transparent. APA process is the most transparent relationship, yet it takes years to build credibility and get tax authorities comfortable with corporate tax strategy… so how will CbC Reporting be effective?
  • Navigating questions from foreign operations as a result of CbC Reporting transparency, explaining differences they now notice in operations from one country to another. This is also an opportunity for consistency and change to operations.
  • New UK law where company’s tax strategy and policy must be publicly disclosed.
  • Increasing the number of foreign countries involved in APAs. After 25 years of primarily US unilateral APAs, now have more bilateral and multilateral APAs.

So, What Does Keep You Up at Night?

  • Transfer pricing differences in each country, potential tax authority use of secret comparables, and the need to navigate and understand regulations to be compliant in each tax jurisdiction.
  • Uncertainty in the environment regarding tax reform, regulatory changes, CbC Reporting.
  • Outside influences that we are not able to directly manage or control.

Transfer pricing is clearly at the forefront of both tax authorities and tax executives and will continue to be a hot topic in the coming years. For additional information on current transfer pricing insights for your business, contact Marina Gentile, Lead, Global Transfer Pricing at Withum by filling out the form below.

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