Tax featured strongly during the election campaign period as the US battled to combat the economic crisis.
“I think the recent IRS threats to increase scrutiny of transfer pricing are very real,” said Mark Bronson of Ceteris in Salem, Massachusetts. “Especially with the hard economic times we are in, the IRS are facing increasing pressure to collect all the revenue dollars that they can.”
“I think there will be lots of activity, but the real area of interest from the international community is intangibles,” said Clinton Stretch, managing principal of the tax policy practice at Deloitte, in Washington, DC. “It will be enormously contentious and very difficult to make any changes in, but I think you will see growing pressure from the government side to reduce the amount of controversy and the amount of flexibility around these matters.”
Changes in this area have already taken place.
“We have seen some activity from the service on intangibles and intellectual property and I think you will continue to see both administrative and legislative examination of the whole question of what to do with intellectual property and other intangibles,” continued Stretch.
President-elect Obama has yet to make clear how he will change transfer pricing rules. However, advisers have been warning clients to be prepared for increased attention.
Cost sharing under fire
“On the cost sharing front, I have heard discussions of plans to hire a lot of additional field agents to specifically try to address cost sharing structures,” said Bronson. “It is a tier one issue for the IRS so they are really trying to take a coordinated approach to it.”
“The Treasury and the IRS have had a hard time trying to get regulations out dealing with cost sharing,” said Len Terr of Baker and McKenzie in Washington, DC. “That is where there is potential for change in the law. I think going off the arm's-length method to a formula is way too absolute, to out of sync with the rest of the world, particularly the OECD and probably has more harm than benefit to it.”
“But a more selective approach that would mean that particularly intellectual property and services could generate significant revenues and would avoid what is ultimately going to be an endless array of controversies,” added Terr. “I see that as a fertile area of focus.”
“We heard during in the campaigns, a lot of discussions of companies shifting their incomes out of the US,” said Bronson. “I think even politically it is necessary that there is going to be an increased focus on transfer pricing and the distribution of income across jurisdictions.”
Complex matters
If the IRS gets the money to hire new agents, the worry is that those brought in will not understand enough about transfer pricing methodology to handle these audits.
“They need to be able to add the resources and adequately train them, it won’t happen overnight,” said Jill Weise, a managing director at Ceteris in Salem.
Even with this lull in activity before the heightened scrutiny really hits taxpayers, advisers strongly warn that changes are coming.
