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IRS takes new approach to corporate tax compliance

The commissioner of the Internal Revenue Service has said the US tax authorities want to take a more strategic approach to dealing with corporate taxpayers.

Douglas Shulman told an international tax conference in Washington, DC last week that this would mean looking at a company’s business objectives and tax planning strategies, rather than examining how it complies with individual sections of the Internal Revenue Code.

“For example, when a U.S. corporation shifts income to a low-tax jurisdiction, we need to look at the entire structure that was created to accomplish this,” he said. “We need to understand the overall planning paradigm… What’s motivating the company...What are the benefits...What are the most aggressive positions…How are they managing tax exposure…In other words, we have to understand what they are trying to accomplish.”

Shulman said the Service’s international compliance programmes would aim to:

· Identify the highest compliance risks among the taxpayer base;

  • Work cases as effectively and efficiently as possible;

  • Not waste the IRS’s and taxpayers’ time on issues that do not pose compliance risk; and

  • Find appropriate ways to resolve cases as soon as possible.

The commissioner, who was speaking at the IRS/George Washington University 24th Annual Institute on Current Issues in International Taxation, outlined the most popular inbound and outbound planning that the IRS comes across. He said that US companies’ outbound tax planning tended to have four goals: income shifting, deferral planning, foreign tax credit management of the foreign tax expenses of a US corporation’s foreign subsidiaries and repatriation of foreign profits back to US either tax-free or at a low rate. These are the areas where the IRS sees the most controversy, Shulman said. In the IRS’s experience, inbound planning for foreign multinationals often covers jurisdiction to tax; income shifting away from the US; inbound financing, and repatriation and reducing withholding tax on the income sent back to the overseas headquarters.

Working in teams

The Service’s attempt to train its staff, including examiners, agents and lawyers, to understand a company’s tax objectives included bringing them together in teams to work on particular issues.

Shulman said a good example of this approach was the reorganisation of the IRS’s transfer pricing programmes last August. The Large Business and International Division (LB&I) now has a director – Sam Maruca – who is responsible for developing and coordinating transfer pricing strategy, training and operational approaches to key matters arising in field examination. He is also responsible for the Competent Authority and the Advance Pricing Agreement programmes. The group in LB&I will work closely with the international lawyers in the Office of Chief Counsel.

“When we are successful in making this major shift, we will do our job much better and companies will benefit from a more meaningful and focused dialogue about issues. We want to spend time on issues that really matter and understand what companies are really doing,” Shulman said.

Shulman is also the chairman of the OECD's Global Forum on Tax Administration. “I am very focused [in this role] on governments moving from information sharing to real, coordinated action,” he said.

He gave one example of a success in this area. In 2010 the US led an effort to develop a protocol for joint audits.

“We thought that the benefits for both governments and taxpayers of a joint audit could be substantial,” Shulman said. “It could reduce taxpayer burden – especially for large multinational corporations that must face audits in multiple jurisdictions on the same set of transactions. It could provide these taxpayers with a timesaving and less resource intensive way to address the tax consequences of a transaction on a bilateral or even multilateral basis. And just as important to a swift resolution of issues, the joint audit could provide certainty for the taxpayer today and in the future.”

The commissioner said the IRS this year on a joint audit with another country. The issue covered transfer pricing for a taxpayer that was a member of the IRS’s Compliance Assurance Programme (CAP).

Shulman said that, in six months, the joint audit resolved the issue bilaterally for the CAP year, and provided the taxpayer with a bilateral APA to cover future years. “Six months is nothing compared to what the taxpayer and taxing authorities would have spent without the joint audit process,” he said.

The joint audit, he said, brought to the fore issues that the IRS would like to see as the basis of tax administration work on an international basis: transparency; real time; certainty and coordinated action between two governments.

Corporate taxpayers should welcome this emphasis on the whole view of their tax affairs, rather than a selection of individual parts.

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