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TAX WHISTLEBLOWER LAW FIRM BLOG
This blog will attempt to re-cap the following newsworthy stories:
- Transfer Pricing Backlash?
- Amazon v. IRS
Transfer Pricing Backlash?
As Previously discussed in this Blog, United States Multi-National Corporations (USMNCs) have been using transfer pricing to stash profits overseas and to avoid U.S. and State taxation.
Recently, one state treasurer is attempting to fight against the USMNCs. In his April Newsletter, Illinois State Treasurer Michael Frerichs advocates for accountability for USMNCs that interact with his office. Mr. Frerichs states that he is in the process of sponsoring a bill in the Illinois legislature that would prohibit companies from doing business with Illinois if it utilizes offshore accounts to avoid paying taxes.
Mr. Frerichs proposal raises several questions including:
- Are more states willing to undertake such measures to ensure that USMNCs pay their fair share?
- Is Illinois willing to enforce this law against companies that are based in Illinois and notorious for using foreign subsidiaries and accounts to hide profits from taxation?
- Why isn't the federal government utilizing this method to ensure better compliance by the USMNCs?
- Will this matte if the US lowers the corporate tax rate to permit USMNCs to bring back the amounts stashed offshore at a reduced rate?
While the answers to these questions are mere conjecture at this point, given the fact that the proposed law has not been passed to ensure compliance by USMNCs doing business with Illinois, it is still refreshing and a welcomed change of pace to the usual rhetoric of allowing USMNCs to continue to stash taxable income offshore.
Amazon v. IRS
In a recent Tax Court opinion (Amazon.com, Inc. v. Commissioner of Internal Revenue, 148 T.C. No. 8 (2017)), the Tax Court held that IRS overstepped its authority in applying a discounted cash flow method to value a cost sharing arrangement between Amazon and its subsidiaries.
This cash involved whether Amazon properly valued an intangible it sold to its offshore subsidiary. The IRS felt that Amazon did not properly value the intangible and sought to apply the discounted cash method to value the intangible. Why did the IRS take this approach? Simple, because it meant that Amazon would have had to recognize more income from the sale of intangible in the US and therefore would also have had to pay more taxes.
Amazon disagreed with the IRS. Amazon stated that the IRS' method violated established precedent in Veritas Software v. Commissioner, 133 T.C. No. 14 (2009). In Veritas, the issue before the Court was the proper buy in the subsidiary was required to pay as a result of a cost sharing arrangement. In Veritas, the Court held that comparable uncontrolled transaction (CUT) was the proper valuation method. Similar to Veritas, Amazon stated that the proper method utilized in its case should have been the CUT method.
The Court held in favor of Amazon. See this synopsis of the case through the Journal of Accountancy.
First: as noted in a previous post, Lionel Messi, Argentinian soccer star, and his father ("Messis") were on trial for tax fraud. Now, as reported in Sports Illustrated, the Messis have been sentenced to 21 months in prison for being found guilty of three counts of tax fraud. However, because Spain suspends sentences for first time offenders if the sentence is less than two years, the Messis will not serve time in jail. Instead Messi and his father will have to pay a fine in the amount of € 1.7 million and € 1.3 million, respectively.
The Court determined that the Messis evaded paying more than € 4 million in taxes on Lionel Messi's image rights between 2007-2009 by sending income through Uruguay, Switzerland and Belize to minimize taxes.
Second: as reported in this SI artcle, NBA superstar Kevin Durant chose the Golden State Warriors and decided to take less money than by staying with Oklahoma City Thunder, or any other suitor. Why did Durant take less money? Simple answer, state income taxes. Using the models in the SI article which makes certain assumptions, Durrant would pay $31 million in state income taxes (to California) compared with $0 state income taxes had he signed with the San Antonio Spurs (to Texas) or Miami Heat (to Florida), and compared with $14 million in state income taxes had he re-signed with the Oklahoma City Thunder (to Oklahoma). So why did Durrant choose to take less money? As stated in this SI article, he wanted a more free flowing (ball moving) offense and was frustrated with recurring issues with a now former teammate (Russell Westbrook).
Why are these cases important/interesting? In the first case (Messis), tax avoidance is not tax evasion, if done properly. In the second case (Durant), personal desire trumped tax consequences.
In the first case, it is interesting that the Messis undertook what in the tax world is known as transfer pricing with the intangible (Messi's image and likeness) and tried, unsuccessfully, to transfer the intangible between Uruguay, Switzerland, and Belize. This same concept has been utilized by very large US multinational corporations (i.e. Apple, Google, Microsoft, Caterpillar, Medtronic, and others) to transfer their intellectual property ("intangible") to low tax jurisdictions (Puerto Rico, Ireland, Netherlands, Switzerland, etc.) to lower their bills in the U.S.
The simple question is why did it work for Apple, etc. and not Messi? One answer may be that a person's image and likeness are not separable from an individual, whereas the intangibles related to non-living things (i.e. iphones, search data, source code, heavy equipment, medical devices, etc.) can be separated from the individual. Or another possibility is that the U.S. is not attacking transfer pricing with U.S. multinational corporations with as much zeal as Spain.
The Durant case is interesting because Kevin Durant chose to pay more state taxes but would be in the type of offense he craved instead of staying in OKC or moving to a tax favorable jurisdiction. So this raises the question of whether tax motivates people to make a decision or whether it is just an afterthought. For more information about state taxes and athletes see this Forbes article. See also this article through Fansided about state taxes and athletes.
If you have specific/credible information about individuals or corporations avoiding the payment of tax through transfer pricing or other methods, you can get involved in preventing/limiting the tax avoidance by filing an IRS tax whistleblower claim. The IRS pays an award between 15% to 30% of the tax collected to a whistleblower that provides specific and credible information about the taxpayer’s avoidance of tax. Contact our firm if you want to discuss filing a tax whistleblower claim.