Tuesday, July 23, 2013
CNN: The Tax Break That Corporate America Wants Kept Secret, by Lynnley Browning:
Widening scrutiny of declining corporate tax bills has singled out the growing use of post office-box subsidiaries in offshore tax havens to hoard cash stockpiles and whisk profits away from higher-tax jurisdictions. Now some experts wonder if advance pricing agreements, perfectly legal under U.S. law and growing in number, sometimes play a major role in helping to shift some of those profits and drive down corporate tax bills. ...
When applying for an agreement, companies must lift the curtain on their tax planning and convince the IRS that it is legitimate. ... Under the deals, the IRS agrees not to challenge the complex financial calculations underpinning the exchange of assets, goods, intellectual property, and money between a company and its overseas subsidiaries, typically in offshore havens like Ireland or the Cayman Islands. The exchange, known as transfer pricing, is supposed to be tallied at arm's length prices, but different methodologies can produce different results. What's clear, tax lawyers say, is that the calculations can be among the single biggest factors in lowering a company's tax bill and boosting after-tax profits.
But some critics argue that through the pacts, the IRS can sometimes give up too much, particularly in an area -- transfer pricing -- that it increasingly considers a primary means of tax abuse by multinational corporations. "Of course companies are sneaking things by the IRS with these deals -- look, they are seeking to get authorization for something they know might not pass muster otherwise," says Robert McIntyre, director of Citizens for Tax Justice, a left-leaning advocacy and research group.
The manipulation of complex cross-border pricing by multinationals with subsidiaries in low-tax jurisdictions is a growing concern inside the IRS, which in 2011 created a new unit to deal with the problem and said it was developing a strategy to litigate abusive cases. Last year it moved its advance pricing program into the unit, saying it wanted to speed up processing of pact applications.
But if the new unit is a stick, the pricing agreements appear at times to be a carrot. The IRS approved a record 140 pacts last year, more than triple the number in 2011. Another 182 are pending renewal. Overall, since the program began in 1991, 1,155 pacts have been executed, IRS data shows. The biggest users are financial services companies with large cross-border trade, and technology and pharmaceutical companies.
Because the details of pacts are not public -- some companies don't even disclose that they have them -- there is no way to know how the IRS is making decisions regarding murky areas of tax law. Critics argue that the process effectively creates a secret body of law, one that might not be applied evenly across companies. Shareholders know nothing of their details. And some tax experts say the IRS, loath to lose legal cases against corporations it sues to collect back taxes, is being more generous than it would be in an audit. "There's a certain amount of compromise on both sides," admitted one former director of the IRS's advance pricing agreement program.
The IRS has always struggled to ferret out tax strategies that skirt the law or take advantage of gray areas. And it has had a dismal record of challenging transfer pricing issues in court -- in 2010 it lost a case seeking more than $1 billion from software maker Veritas, now part of Symantec. So when the agency created a program for the pacts, in 1991, it envisioned a way to lighten its burden of scrutinizing a company's books.
The IRS says the pacts are "designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the traditional adversarial process." Michael Durst, a former director of the program, who is now at Steptoe & Johnson, said that "the goal, from the standpoint of the IRS, is that APAs won't either increase or reduce companies' tax bills -- instead, an APA will achieve the same result that a company would have reached after audit and possible litigation, but without all of the uncertainty and transaction costs."
- Tax Analysts Blog, Shedding Light on Advance Pricing Agreements, by Jeremy Scott