• New definitions of intangible property are broader, more inclusive
• IRS wants transfer pricing disputes to center on facts, economics
U.S. tax reform will shut down many of the “legalistic” arguments multinationals have been successfully making about their global tax planning schemes—leading the IRS to believe it can win more intercompany pricing cases, an official said.
Instead of arguing about the language of its regulations, the Internal Revenue Service will be able to argue in court “the really hard debate about facts and economics” that should be the fundamentals of a transfer pricing case, said Chris Bello, a branch chief at the IRS Office of International Tax Counsel.
“We're confronted by a myriad of what I would refer to as legalistic arguments, based
on the code and regs, that short-circuit or circumvent that hard factual and economic
debate—which we think, by and large, we have a good chance to win,” Bello said at
a May 22 event at the District of Columbia Bar Association.
Altered Transfer Pricing Rules
The principles of transfer pricing are used when individual units of a larger multi-entity company are treated as being separately run.
The 2017 tax act (Pub. L. No. 115-97) changed a key part of the tax code's transfer pricing rules: Section 482, which pertains to the valuation of outbound transfers of intangible property. The definition of intangible property was expanded to explicitly include goodwill, going concern value, and workforce in place, which were previously part of regulations but not in the code's listing of types of intangibles.
The statute, in sections 367(d) and 482 of the Internal Revenue Code, also defines as intangible property any “other item the value or potential value of which is not attributable to tangible property or the services of any individual.”
Companies were able to argue that a transferred intangible should not be valued in their tax calculation because the language of the code did not explicitly include that intangible. No longer.
Today, “there is no longer a category of intangible property or residual value that can be transferred outbound” without being recognized, said Rocco Femia, a principal at Miller Chevalier Chartered, speaking at the same event. “It doesn't exist anymore because we've added goodwill, going concern value and workforce-in-place to the list.”
“I think these changes do sort of change the playing field in that regard,” he said.
“Hopefully these revisions to the code help us get a little bit closer to having the
hard debates we're supposed to have in this area, and not get lost in these legalistic
arguments that if you think about them in context of what 482 is trying to do, and
what the arm's-length standard seems to want us to do, they really don't make very
much sense,” Bello said.
Defending the Comparable Profits Method
The IRS has also lost cases after courts rejected its use of the “comparable profits” method, a transfer pricing method that looks at similarly situated taxpayers to value a transfer, Bello said.
“In virtually every case I've seen in audit where the IRS is using a CPM and the other side is not, one of the arguments we get is that the CPM isn't a valid method, no court has ever accepted it,” Bello said. “And that's yet one more fight we have to fight, despite the fact it's been in the regs since 1994, and was used by courts before it was ever in the regs.”
“We'd much rather have a debate about ‘why is the CPM the right method to use in this case,’ and not have a debate about whether our CPM reg really is valid,” he said.
Even though the changes to the Internal Revenue Code did not explicitly address the comparable profits method, Bello said, the statutory changes should be interpreted as supporting the IRS position.
“I think that that's what's behind the changes to the code,” Bello said. “We can't write a statute that just lists all the problems we've ever faced and then say they're all gone. But these are a couple that are pretty darn big, and they really go to the idea of using methods that are based more on economic models than about comparables.”
“I think it just more importantly sends an overall message that we've been on the right track,” he added.
To contact the reporter on this story: Isabel Gottlieb in Washington, D.C. at firstname.lastname@example.org
To contact the editor responsible for this story: Kevin A. Bell at email@example.com