Facebook and its Transfer Pricing Issues

In addition to Google having European leaders questioning the validity of its transfer pricing models and shifting profits from France, Facebook is also having IRS inquiries about its transfer pricing practices.

As noted in this Reuters' article, the IRS is looking at whether Facebook transferred its intangibles to its Irish subsidiary at too low of a price.  As stated in the Reuter's article, by raising the transfer price of the intangible to the Irish subsidiary, Facebook could have increased taxable profits in the US. The article quotes the complaint which alleges that Facebook may have understated the intangible by billions of dollars.  Facebook was advised in the transaction by Ernst & Young.

Recent news also indicated that Facebook has hired Baker & McKenzie to fight the IRS in this transfer pricing dispute.  As you will recall, Baker & McKenzie just won a major victory against the IRS in the Medtronic case.

In Medtronic, IRS challenged the profit split calculation paid to Medtronic's Puerto Rican subsidiary, by stating that the Puerto Rican subsidiary was nothing more than a contract manufacturer for Medtronic.  Medtronic claimed that its Puerto Rican subsidiary was instrumental in its efforts because it oversaw the quality of Medtronic's products.  The Court determined that IRS's method (valuing the Puerto Rican subsidiary as solely a contract manufacturer) was arbitrary and capricious and therefore IRS abused its discretion. However, the Court didn't stop there, it also stated that Medtronic's proposed model was a better approach (Medtronic chose a comparable transaction involving a competitor and argued that it was actually due a refund), but adjusted the model to better match Medtronic's business.  The Court ended up with the rate the parties had previously agreed to in prior settlements of their transfer pricing dispute.  See these articles: Wall Street Journal and BNA.

While it is refreshing to see that the IRS is challenging US Multinational Corporations at their use of transfer pricing, the question remains whether these challenges will be upheld.  See prior blogs regarding transfer pricing, inversions and earnings stripping.

If you know of a corporation undervaluing assets in its transfer pricing models, contact our firm to discuss filing a tax whistleblower claim.  IRS will pay an award between 15-30% of collected proceeds (tax, penalties, and interest) to whistleblowers who provide substantial and credible information used by the IRS in prosecuting the alleged tax violators.

How to Report IRS Scammers

March 17, 2016 Press Release
TIGTA - 2016-07
Contact: Karen Kraushaar, Director of Communications
Karen.Kraushaar@tigta.treas.gov
(202) 622-6500
 

J. Russell George Urges Taxpayers to Remain Vigilant Against Scammers

Inspector General Sees Progress in TIGTA’s Efforts to Impede IRS Impersonators

WASHINGTON — Noting progress in the counteroffensive against Internal Revenue Service impersonators who make threatening telephone calls to taxpayers, the Treasury Inspector General for Tax Administration nonetheless advised taxpayers to stay on high alert through the end of the 2016 tax filing season.

“Without question, TIGTA’s efforts have impeded these criminals’ ability to victimize taxpayers over the past few months,” the Inspector General, J. Russell George, said. He noted that TIGTA’s four-part strategy to thwart callers is working. “These efforts are producing results,” he said. “Where the perpetrators used to be able to get a victim every 40-50 calls, now they must make 300-400 attempts to claim a victim,” he added.

TIGTA’s counteroffensive consists of: 1) using an autodialer to call the scammers to advise them that their activity is criminal and to cease and desist; 2) working with telephone companies to shut down the telephone numbers used to perpetrate these crimes; 3) publishing telephone numbers associated with the criminal activity on the Internet; and 4) engaging in outreach efforts with the public, the media, Congress, and other stakeholders to educate taxpayers about the scam. In January, TIGTA launched a series of Public Service Announcements on YouTube; this month, they also became available on the IRS’s YouTube channel.

“Criminals view this scam as they do many others; it is a crime of opportunity,” he said in congressional testimony March 8. “While we plan on arresting and prosecuting more individuals, the scam will not stop until people stop paying the scammers money,” he added. “Our best chance at defeating this crime is to educate people so they do not become victims in the first place. Every taxpayer we protect from this crime is a victory.”

TIGTA has received reports of more than one million contacts since October 2013 and has become aware of over 5,500 victims who have collectively paid approximately $29 million as a result of the scam in which criminals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials and demanding that they send them cash via prepaid debit cards, money orders or wire transfers from their banks.

“If someone unexpectedly calls claiming to be from the IRS or in a new twist, the Treasury Department, and uses the threat of legal action if you do not pay immediately, that is a sign that it is not the IRS calling, and your cue to hang up,” he said. “Again, do not engage with these callers. If they call you, hang up the telephone.”

Inspector General George noted that the scam has hit taxpayers in every State in the country. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card, money order or a wire transfer. The scammers threaten those who refuse to pay with being charged with a criminal violation, a grand jury indictment, immediate arrest, deportation or loss of a business or driver’s license.

Here is what you need to know. The IRS generally first contacts people by mail – not by phone – about unpaid taxes and the IRS will not ask for payment using a prepaid debit card, a money order or a wire transfer. The IRS also will not ask for a credit card number or your bank information over the phone.

If you get a call from someone claiming to be with the IRS asking for a payment, or your credit card or bank account information, here’s what to do:

• If you owe Federal taxes, or think you might owe taxes, hang up and call the IRS at 800-829-1040. IRS workers can help you with your payment questions.
• If you do not owe taxes, fill out the “IRS Impersonation scam” form on TIGTA’s website, www.tigta.gov or call TIGTA at 800-366-4484.
• You can also file a complaint with the Federal Trade Commission at www.FTC.gov. Add “IRS Telephone Scam” to the comments in your complaint.

TIGTA encourages taxpayers to be alert to phone and e-mail scams that use the IRS name. The IRS will never request personal or financial information by e-mail, text, or any social media. You should forward scam e-mails to phishing@irs.gov. Do not open any attachments or click on any links in those e-mails.

Read more about tax scams on the official IRS website at www.irs.gov.

Another Tax Authority allegedly is not doing its job....This time it isn't the IRS

Her Majesty's Revenue & Customs(HMRC) Self Assessment Tax Return

In the news lately, the IRS has been criticized for not doing its job.  Specifically, the Speaker of the House (Paul Ryan) has stated “The IRS is not doing its job. It is looking out for itself instead of looking out for our taxpayers,” when introducing the House Republican agenda for #ConfidentAmerica.  Speaker Ryan’s comments relate to IRS’ alleged inability to protect taxpayer payer information.  See Forbes or Tax Analysts articles re IRS online transcript service hacked by criminals.

News disclosed of IRS inability to protect taxpayer sensitive data, along with recent IRS headlines (including: Lois Lerner and the IRS targeting fiasco, etc. (See TaxProfBlog’s ongoing coverage of the “IRS Scandal and other IRS related news)) continues to undermine the IRS and continues to fuel Congress’ attacks of IRS especially through recent House bills passed aimed at shutting down the IRS.

Given this context, one would assume that news of another taxing authority not doing its job would just be a re-tread of another example of the IRS failing to do its job.  Instead, the recent news from Bloomberg BNA, actually highlights the U.K.’s tax collecting agency’s ((Her Majesty’s Revenue & Customs) HMRC) failure to prosecute tax evaders connected to the HSBC bank leak.  The Bloomberg BNA blog highlights that only one of 3,600 alleged tax evaders has been prosecuted by HMRC, which is costing the U.K. approximately 16 billion pounds ($23 billion) in tax revenue each year.   See the U.K. Public Accounts Committee (PAC) Report criticizing HMRC and its November 2015 Report also criticizing HMRC for its failures.  PAC recommended increasing investigations and prosecutions of wealth individuals, especially given the recent release of the Panama Papers.

With all these attacks on taxing authorities, it begs the question whether the attacks are justified, or whether the people attacking the taxing authorities are providing enough guidance and/or resources to permit the taxing authority to properly do its job.  One such advocate is the editorial board at the Washington Post.  The Washington Post commentary suggests that the source for the IRS’ lack of customer service is the House Republicans (the same group that just passed measures to underfund and restrict the IRS’ authority).  The Washington post article relies on the following facts:

1. IRS budget is $500 million below the 2010 budget level;
2. IRS has had to shed 17,000 workers
3. IRS has increased responsibilities including Obamacare (Affordable Care Act), FACTA (Foreign Account Tax Compliance Act), and the passport law (Fixing America’s Surface Transportation Act, or “FAST Act.”).

The Washington Post commentary concludes that House Republicans are rewarding tax cheats by de-funding the IRS, as the IRS will just conduct fewer audits and cost the U.S. government $8 billion.  The commentary also concludes that Congress should adequately fund the IRS instead of attacking the IRS.

While the Washington Post article makes several key points, the Washington Post article fails to address one area where IRS and IRS management can help in to minimize House Republicans’ attacks against the IRS.  The IRS and IRS management specifically, can utilize one tool Congress has provided the IRS to close the tax gap, namely the IRS whistleblower program.  IRS management could make a priority in taking whistleblower tips and utilizing whistleblowers to track down the tax evaders and collect the delinquent taxes.  Instead, as the GAO has reported in 2015 and as blogged here by Thomas C. Pliske, the IRS has vastly under-utilized the whistleblower program.

Perhaps if the IRS were to feature the whistleblower program, it could increase revenue collected despite the budget constraints, and also turn the tide against the “bash the IRS” movement, by demonstrating that it is doing its job, collecting taxes of the United States.

If you have specific or credible evidence of an individual or corporate taxpayer not paying its tax liabilities, please contact us, to discuss filing a claim for an award with the IRS.  IRS pays between 15-30% of the collected proceeds (in excess of $2,000,000) to a whistleblower.