Transfer Pricing News: Is the IRS doing its job?

As previously addressed in this blog, U.S. Multinational Corporations (USMNCs) are circumventing paying taxes in the United States through Transfer Pricing, Earnings Stripping and Inversions.  This blog also questioned whether tax holidays are just tax breaks for USMNCs that have utilized the three methods to avoid US taxation.

In recent news, (CNN Article), the French government has seized records from Google in an attempt to prove that Google evaded French taxes.  Based on the article, the French anti-corruption officers and tech experts raided the Google offices to ascertain the scope of Google's business in France.

In the same article, CNN points out that Google has recently agreed to pay about £130 million ($185 million) to the U.K. government, so this raid by French authorities may be an attempt to get Google to pay additional taxes in France.

While these events are interesting, the real question here is: why isn't the IRS raiding or requesting additional information from Google to ascertain the extent of its U.S. based business activities, so that the IRS can collect taxes in the U.S. despite Google's extensive use of transfer pricing (Dutch Sandwich strategy)?

Another CNN article points out that the EU is starting to tax corporations despite their use of transfer pricing to minimize taxes in European countries.  The article states that if the EU approves the new rules, companies would have to disclose more detailed records, which would be shared by the EU countries to ensure that all the taxes are being paid.  The article also highlights that EU countries are losing about $70 billion dollars in lost tax revenue from corporations shifting income. Finally the article also discusses other USMNCs that are paying additional taxes to EU countries.

These recent EU actions, as stated above, highlight a glaring weakness to the IRS' approach to transfer pricing; namely, why are EU countries able to get the USMNCs compliance with paying additional taxes and the IRS continues to let the USMNCs avoid taxation?

Perhaps this may be another reason why the House is seeking to impeach the IRS Commissioner.  See this MSN article, stating that the House is seeking to impeach the Commissioner due to the political group targeting scandal.  Maybe the Commissioner should direct his attention to transfer pricing and focus his efforts on collecting from the USMNCs that are not paying their taxes like our European counterparts.

If you have specific and credible information about a company utilizing transfer pricing to minimize its US taxes, contact us about filing an IRS Whistleblower claim to assist the IRS in attacking various abusive transfer pricing applications by USMNCs.

Apple and its European Commission Troubles: hype or real transfer pricing liability for Apple

Since June 2014, The European Commission (“EC”) (European Union's politically independent executive arm, made up of 1 commissioner from each EU country) has investigated Apple, and more specifically the tax authorities in Ireland, to determine if the Irish tax authorities followed the EU rules on state aid in issuing favorable tax rulings to Apple.

As explained in the Permanent Subcommittee on Investigations (PSI) report on Apple, Apple utilizes “key offshore subsidiaries incorporated in Ireland.”  The reason Apple has utilized the Irish subsidiaries is that “Ireland has provided Apple affiliates with a special tax rate that is substantially below its already relatively low statutory rate of 12 percent,” generally negotiated with the Irish government to be at rates at 2% or less. See pg. 20.

Apple CEO Tim Cook, in his 60 minutes interview, has called the investigation “political crap” and has stated that “there is no truth behind it.”  Mr. Cook has also stated in the same interview that “Apple pays every tax dollar we owe.” 

Some news outlets (Bloomberg, Guardian) have stated that Apple could “be on hook for $8 billion in taxes”.  Bloomberg calculated this figure by stating that if the EC terminates the Irish rulings for Apple, and requires Ireland to seek recourse tax payments from 2004-2012 on profits of $64.1 billion at a 12.5% rate, that would generate $8 billion in taxes owed by Apple to Ireland.

While other news outlets (Forbes and in a recent opinion piece in Forbes) has stated that Apple isn’t on the hook for $8 billion, but that the Irish government is being investigated and that the true amounts Ireland may request from Apple, assuming the EC rules against Ireland’s rulings favoring Apple, would be more in the $200 million range, and not the $8 billion figure used by Bloomberg.  Mr. Worstall in the Forbes opinion piece states explains that the reason behind the lower figure is due to the structure employed by Apple, the Double Irish structure.  He states that some profits can be taxable in Ireland and some profits are not taxable in Ireland, so the Bloomberg calculation, which treats the entire amount of profits ($64 billion) as taxable in Ireland is incorrect.  Mr. Worstall explains that Bloomberg’s figure is wrong because it fails to account for transfer pricing even between Apple’s Irish entities, which might shield the non-Irish resident income from being taxed in Ireland.

Two noteworthy observations regarding Apple’s EC investigation are:

1. If as Mr. Worstall states, the game is transfer pricing and the prices allocable between the various Irish entities, then what about the transfer price between Apple Inc. (the U.S. entity) and AOI (Apple’s primary Irish entity identified in the PSI hearings)?  If the EC is examining whether the proper transfer pricing and applicable tax rates are at play, why isn’t the IRS examining Apple to determine if Apple used the proper transfer prices to shift the U.S. developed technologies and intellectual property to its offshore operations to pool an estimated $181 billion dollars offshore through the Irish entities instead of being taxed in the United States.
2. Panama Papers part 2.  Previously I blogged about the Panama Papers and whether U.S. corporations and individuals would be exposed.  Give the exposure Apple has gotten over its use of Irish entities, and the knowledge that other companies and individuals have utilized offshore entities to grow their wealth, why hasn’t there been more disclosures of companies and individuals in the U.S. that have taken advantage of offshore entities.  If PSI can expose Apple’s offshore structure, why couldn’t the IRS expose other companies’ offshore transfer pricing structure?

If you have specific and credible evidence of a corporation’s use of transfer pricing to avoid paying its tax liabilities you should consider filing a tax whistleblower claim.  Contact us to see if your information would permit you to receive a 15-30% award of the amount of taxes, penalties and interest collected by the IRS on your transfer pricing tax whistleblower claim.

Inversions, Earnings Stripping and Transfer Pricing, the triumvirate of U.S. companies avoiding U.S. taxation.

As previously noted on this blog, the American public is now aware of U.S. companies inverting to a foreign jurisdiction to reduce or eliminate its U.S. income tax liabilities.  The publicity (see here for outrage over Pfizer’s inversion attempt in 2014 and response by the President and the Treasury’s new Regulations attempting to curtail inversions here) that inversions have received fail to paint a complete picture of the ability of U.S. corporations and former U.S. corporation from avoiding U.S. taxation.

As found here, Professor Steven Davidoff Solomon, outlines in his N.Y. Times article the next step to maximize the inversion by the former U.S. corporation is to strip the earnings from its now U.S. subsidiary.  As noted by Professor Solomon, the process starts by having the inverted offshore parent company make loans to its now U.S. subsidiary to pay for its operations in the U.S.  The loans would generate interest payments to the offshore parent company, which can be deducted by the U.S. subsidiary to offset the earnings (otherwise taxable) in the U.S. 

Professor Solomon also references the studies of inverted companies and their earnings stripping efforts in 2004 (See National Tax Journal 2004 Article, “Effective Tax Rate Changes and Earnings Stripping Following Corporate Inversion”) and the Treasury’s 2007 article regarding the same.  Professor Solomon also notes that while Treasury has attempted to minimize the inversions, there is little being done to stop earnings stripping.  Finally Professor Solomon suggests that the Treasury and Congress adopt a radical approach to prevent earnings stripping, namely Professor Stephen Shay’s article, which would convert the interest payments to the foreign parent to taxable dividends instead of interest income.

While these articles address the effect of inversions and continued expansion of the Tax Gap (See IRS’s website describing the Tax Gap at $2 trillion annually) the current focus on inversions and earnings stripping fail to address how U.S. companies are currently reducing their tax liabilities through transfer pricing.  For a brief description of transfer pricing, see Bloomberg articles here and here.

As documented by the Senate Permanent Subcommittee on Investigations (“PSI”) (See Part 1 (Microsoft and HP) of the PSI hearing on Offshore Profit Shifting and U.S. Code; or Part 2 (Apple), U.S. Multi-National Corporations (“MNC”) have aggressively taken advantage of Transfer Pricing (Section 482) and Subpart F to shift profits to its low tax offshore subsidiaries.  PSI recommends the following changes to address Transfer Pricing abuses including the following: 1. Revise Sections 482 and 956; 2. Revise APB 23 to minimize MNC’s ability to manipulate the earnings reports to enable transfer pricing; and 3. Have IRS utilize its anti-abuse powers to stop transfer pricing.  See PSI’s recommendations.

Despite these recommendations, Congress and the IRS have yet to successfully limit or prohibit U.S. MNC from stripping the earnings from U.S. companies by shifting the profits offshore through transfer pricing.  However, IRS has aggressively pursued MNC on transfer pricing issues regarding cost sharing arrangements between the parent and subsidiary corporations of the MNCs.  See International Tax Review’s summaries of IRS transfer pricing cases.  For example, see the following active IRS cases on transfer pricing issues:

1. Microsoft: IRS is challenging Microsoft’s cost sharing buy-in payment arrangement between Microsoft and its Bermudian Affiliate and its Puerto Rican Affiliate (see Microsoft Corporation vs. Internal Revenue Service, 15-cv-00850, U.S. District Court, Western District of Washington);
2. Amazon: IRS is challenging Amazon’s cost sharing agreement between Amazon and its Luxembourg subsidiary (see Amazon.com, Inc. v. Comm’r, T.C. Docket 31197-12);
3. Zimmer: IRS is making 482 adjustments between Zimmer and its Dutch subsidiary (see Zimmer Holdings, Inc. v. Comm’r, T.C. Docket 19073-14); and
4. Medtronic: IRS is challenging Medtronic’s value of intangibles transferred between Medtronic and its Puerto Rican subsidiary (See Medtronic v. Comm’r, T.C. Docket 6944-11)

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 us if you want to file a tax whistleblower claim.