Not all Press is Good Press
News stories exposing many large multinational enterprises (“MNEs”) like Apple, Starbucks, Google, etc. for utilizing tax avoidance schemes are motivating governments and tax authorities around the world to quickly ramp up enforcement of tax rules intended to mitigate the ability for MNEs to implement such schemes. More than ever, tax authorities have a clear focus on ensuring that members of MNEs compensate one another for transfers of goods, services and intangibles as if the members were unrelated (referred to as the arm’s length standard). In fact, Internal Revenue Service (“IRS”) tax audits of all MNEs, both small and large, must include an assessment of whether intercompany transactions are priced at arm’s length.
Preparation is the Key to Success
Where a taxpayer can provide documentation demonstrating intercompany prices adhering to pre-determined, arm’s length pricing policies established in reasonable accordance with local country rules and regulations, the taxpayer is often able to sustain their intercompany pricing position(s) in a tax audit. However, in the absence of such support/documentation, tax authorities have increased latitude to adjust a taxpayer’s intercompany pricing and assess additional taxes. Due to resource constraints, small and medium size enterprises (“SMEs”) generally allocate fewer resources to preparing appropriate support/documentation for pricing policies. As a consequence, a large portion of IRS tax audits of SMEs result in adjustments to intercompany pricing that increase U.S. taxable income in a prior year. When this happens, IRS requires a taxpayer to pay tax on income that has already been taxed in the jurisdiction of the non-U.S. counterparty to the transaction.
Double Taxation? No Way – There’s a MAP for that!
In an effort to encourage commerce and trade, the U.S. Department of the Treasury has entered into treaties with tax authorities around the world that require IRS and the relevant taxing authorities to engage in a Mutual Agreement Procedure (“MAP”). Under MAP, the IRS and the tax authority of the treaty country discuss the facts and circumstances relevant to instances of double taxation and collaboratively determine how to allocate the income between jurisdictions so it is not taxed twice. This type of policy/arrangement is popular because governments strive for economic growth and MNEs are more likely to expand their businesses, ceteris paribus, when there is more certainty in the outcomes of such endeavors.
When double taxation arises from an adjustment to a transaction with an entity that operates in a treaty county, U.S.-based taxpayers may seek relief from double taxation by submitting a request for MAP to IRS’s Advance Pricing and Mutual Agreement Program (“APMA”). Personnel of this program, commonly referred to as the U.S.’s competent authority (“CA”), comprise IRS’s representative unit responsible for resolving tax treaty issues. Foreign tax authorities employ similar groups of personnel that form their CAs. MAP is the strongest dispute resolution mechanism to use, because in a MAP both countries have to come together and agree on a solution. Every government and tax authority acts on its own behalf, trying to protect itself from losses or being “ripped off” by the MNE or the other country
The timeline for MAP proceedings in the U.S. is typically 1-2 years and follows the steps listed below. That said, the level of resources taxpayers allocate to a MAP proceeding varies considerably based on the case’s facts and circumstances. Similar processes are employed by foreign tax authorities.
- After being issued IRS’s notice of proposed assessment (Form 5701), taxpayer submits a request for MAP to APMA (see Rev. Proc. 2015-40)
- U.S. CA will try to resolve the issue unilaterally (without contacting the other CA). If a unilateral resolution is not reached, the U.S. CA will contact the foreign CA and negotiate a resolution.
- The taxpayer is notified, in writing, of the resolution.
For more information on MAP or for any other questions regarding transfer pricing, please contact Ben Miller by calling 770.396.2200.