Transfer Pricing

As discussed in my prior blog, Inversions are one method that corporations (formerly located in the United States) can shift their income offshore and not be taxed in the United States.  While this is one method to increase profits and earnings outside the United States and away from taxation, another method would be to utilize transfer pricing.  See Bloomberg articles (http://www.bloomberg.com/news/articles/2010-05-13/american-companies-dodge-60-billion-in-taxes-even-tea-party-would-condemn or http://www.bloomberg.com/news/articles/2010-05-13/exporting-profits-imports-u-s-tax-reductions-for-pfizer-lilly-oracle) for a brief background about transfer pricing.

As everyone is aware, Tim Cook, Apple’s CEO was recently featured on 60 Minutes defending Apple’s Transfer Pricing operations.  In the interview, Tim Cook claims that he is not bringing back the money to the United States because 40% would be stripped away for taxes.  Mr. Cook’s comments are interesting because by characterizing taxes paid to the US as striping away value implies that the profits were not subject to tax in the first place.  Mr. Cook’s comments ignore the fact that in the United States, corporations are taxed on worldwide income and that the tax on the profits that Mr. Cook alleges are being stripped of their value by 40% were to have been paid to the U.S. government prior to shifting the profits offshore through transfer pricing.  

For a re-cap of Apple’s Transfer Pricing efforts, see Exhibit 1 of the Congressional Permanent Subcommittee on Investigation’s (“PSI”) report on Apple’s Transfer Pricing efforts.

But Apple is not the only company taking advantage of transfer pricing to shift its profits offshore and to avoid taxation in the United States.  See Reuter’s article re-capping the Citizens for Tax Justice’s and the U.S. Public Interest Research Group Education Fund’s report on the top US companies holding over 2.1 trillion dollars offshore or Rolling Stones article about companies avoiding U.S. taxes.

For more information on the other companies taking advantage of transfer pricing see the Congressional PSI hearings on Microsoft and Hewlett Packard. Also see Bloomberg’s article on Google’s use of transfer pricing to lower its tax rate to 2.4% or Bloomberg’s article about pharmaceutical companies using transfer pricing.

The problem people have with the large multi-nationals isn’t that they are using transfer pricing, but that they are using transfer pricing to avoid paying tax on profits, and then flaunting the use of the untaxed funds.  See Apple’s use of debt instruments to utilize its offshore cash horde to avoid paying taxes.  See also Congressional PSI’s report on the use of the alleged undistributed accumulated foreign earnings utilized in US assets (in US bank accounts or in US treasuries or US corporations.

If you feel strongly about the injustice of transfer pricing and have specific/credible information about corporations avoiding the payment of tax through transfer pricing, 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 with specific and credible information about a corporate taxpayer’s avoidance of tax (through transfer pricing, or other methods).   Contact our firm if you want to file a tax whistleblower claim.

GAO Issues 2015 Report on IRS Whistleblower Program

Today, November 30, 2015, the U.S. Government Accountability Office (GAO) issued its report on its audit of the IRS Whistleblower Program.  The title of the Report is simply “Billions Collected, but Timeliness and Communication Concerns May Discourage Whistleblowers.” 

The IRS Whistleblower Program is a work in process that has, and will continue to, change over time.  The IRS Whistleblower Program is the most powerful tool that Congress could have given the IRS to enforce tax compliance.  However, to date, the IRS has failed to properly utilize this tool in accordance to its mission statement. 

For unknown reasons (perhaps the IRS lack of resources, its failure to prioritize these cases, and its overall attitude towards the success of the program, etc.) the IRS has not prioritized and expedited these whistleblower cases resulting in a weak program.

As time brings change, perhaps, the following Recommendations, as set forth by the GAO, will bring good changes to the program.

Matter for Congressional Consideration

1.     Matter: To further encourage whistleblowers to provide information to IRS about serious tax noncompliance and to protect whistleblowers, Congress should consider legislation that would provide protections for tax whistleblowers against retaliation from their employers.

Recommendations for Executive Action

1.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to strengthen the procedures for calculating award amounts and for the issuance of the preliminary award recommendations and award letters to whistleblowers. Such procedures should include, at minimum, a documented process for: (1) supervisory review prior to the director's concurrence, (2) verifying collected proceeds prior to an award payment for both the 7623(a) and 7623(b) programs, and (3) reviewing preliminary award recommendation and award letters to the whistleblower prior to their issuance.

2.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to provide additional information in the annual report to Congress to better explain the statistics provided and the categories of claim review steps reported. Specifically, the report should (1) include correct, reliable data that reflect only the activities of the fiscal year of the report; (2) describe all status categories and clearly identify claim type in the tables; and (3) include an overall timeliness measure (by providing an average and range) to show how long claims take to go from submission of Form 211 to closure decision.

3.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to develop an additional or revised fact sheet about the whistleblower claim process and/or publish additional information on the IRS website. Such information should include (1) an outline of the entire claim review process, with an average time or time range for the various review steps; (2) a description of the key taxpayer rights that a taxpayer may exercise and how much time this may add to a claim's review; (3) examples to illustrate common circumstances that result in denials; and (4) items to include in a Form 211 submission, and suggestions for the types of documentation that are particularly helpful to the WO.

4.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to develop a comprehensive plan for evaluating the costs and benefits of the pilot annual status letter program, including obtaining feedback from whistleblowers in the pilot regarding the usefulness of the letter.

5.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to establish a process to ensure whistleblower addresses are being properly updated in E-TRAK to ensure the WO does not send whistleblower mail to outdated or incorrect addresses. This process could include developing a change of address form specific to whistleblowers and including a blank copy of it in every correspondence with whistleblowers or referencing the importance of updating the WO with any address change in every correspondence with whistleblowers.

6.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to formally document a procedure for return address labels for mail originating from the WO that states that external envelopes should not identify the WO as the sender of the correspondence.

7.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to record refund statute expiration dates in E-TRAK and monitor expiration dates routinely so that the award payment process can start as soon as the claims are eligible for payment.

8.     Recommendation: To ensure timely and consistent information to Congress and the public, the Secretary of the Treasury should issue its Whistleblower Office annual report to Congress no later than January 31st each year covering the prior fiscal year.

9.     Recommendation: The Commissioner of Internal Revenue should direct the Whistleblower Office Director to implement a staffing plan for streamlining the intake and initial review process to make more efficient use of staff resources.

10.    Recommendation: The Commissioner of Internal Revenue should direct the Deputy Commissioner for Services and Enforcement to develop guidance for examiners in operating divisions to use in determining whether an Internal Revenue Code section 6103(n) contract with a whistleblower would be beneficial and outline the steps for requesting such a contract.

11.   Recommendation: The Commissioner of Internal Revenue should direct the Deputy Commissioner for Services and Enforcement to strengthen guidance and procedures to ensure whistleblower information is retained only in the proper file locations. Such procedures could include requiring management sign off of taxpayer file reviews to ensure all whistleblower information has been appropriately segregated and sent back to the WO.