Inside this edition: IRS LB&I Division Implements New Approach to Resolving Taxpayer Issues; Basel III Update; and 2013 Changes to the Australian Transfer Pricing Landscape.
IRS LB&I Division Implements New Approach to Resolving Taxpayer Issues1
Since 2006, the IRS’ Large Business and International (“LB&I”) division has utilized a Tiered Issue Process to set priorities and address certain corporate tax compliance issues. Following a review of this approach, the LB&I division determined that a different method to managing compliance priorities is needed, and that this new method would have to meet the following objectives:
Thus, effective August 2012, LB&I will no longer manage issues using the Tiered Issue Process. Instead, the LB&I division is currently developing a “knowledge management network” through the use of Issue Practice Groups (“IPGs”) for domestic issues, and International Practice Networks (“IPNs”) for international issues. Both IPGs and IPNs will provide the examination teams with the technical advice they need in order to manage cases efficiently, consistently, and proficiently by fostering effective collaboration and knowledge sharing across the LB&I division.
This new approach is anticipated to have the following long-term benefits:
The removal of the Tiered Issue Process marks yet another step in the IRS’ campaign to resolve tax compliance issues at the lowest level, increase collaboration between subject matter experts to appropriately address taxpayer issues, and reduce audit cycle times. With the implementation of IPGs and IPNs, taxpayers will be able to contact technical specialists directly and alleviate many of the frustrations of a “one-size-fits-all” approach (i.e., the inability to distinguish between taxpayers’ unique fact patterns/ circumstances) that was manifest under the Tiered Issue Process.
Basel III Update
As previously reported, various aspects of the revised capital and liquidity standards for financial institutions, advocated by the Basel Committee on Banking Supervision and in the process of being reviewed for adoption by national regulatory authorities, have important transfer pricing implications (see Ceteris Transfer Pricing Times, Volume IX, Issue 10). In January of 2013, the Basel Committee took steps that would soften the impact of key components of the “Basel III” standards, likely allowing for a more muted and phased-in process for addressing the corresponding transfer pricing concerns.
Basel III, as originally disseminated in 2010, includes requirements that financial companies hold a “liquidity buffer” to guard against unforeseen stress events. This buffer included a Liquidity Coverage Ratio (“LCR”) and a Net Stable Funding Ratio (“NSFR”). The LCR mandates minimum holdings by financial institutions of high-quality/low-risk assets relative to projected 30-day cash outflows under stress conditions, while the NSFR aims to stabilize an institution’s funding sources relative to the liquidity characteristics of its assets. Both requirements would result in additional costs, due to increased holdings of low-yielding assets as well as the need for longer-term funding. The transfer pricing issue raised is how such costs should be shared (e.g., between a parent company and its subsidiaries and branches).
On January 7th of this year, the Basel Committee released a new proposed definition of the LCR, one which expands the definition of high-quality assets to include corporate debt (original definition was largely limited to cash and government bonds), unencumbered equities, and highly-rated residential mortgage-backed securities. In addition, while the LCR standard will take effect as planned on January 1, 2015, the minimum requirement will begin at 60 percent, rising 10 percentage points each year until full implementation on January 1, 2019.
This rethinking of the LCR requirement is fueling speculation that the other shoe is bound to drop, with respect to the NSFR. The two standards are somewhat linked, insofar as the NSFR is in some ways a longer-horizon equivalent of the LCR, so that it may not make sense to loosen the standards on one of them in isolation. Further, keeping in mind that the announced changes to the LCR followed a period of review and protest by financial institutions, market participants are likely to be encouraged to pursue a similar softening of the NSFR approach. It is even within the realm of possibility that the Basel Committee will do away with the NSFR entirely (though perhaps not likely unless memories of the Lehman Brothers debacle have faded completely).
Regardless of the eventual fate of the NSFR, or any additional changes to the LCR for that matter, the clear trend is a relaxation of the Basel III compliance regime, relative to what had been originally proposed. The corresponding reduction in additional costs that would be incurred by multinational financial institutions perhaps mitigates the transfer pricing implications. To the extent that some banks have already put in place charging methodologies in anticipation of such costs, a reassessment may be in order.
2013 Changes to the Australian Transfer Pricing Landscape
Further to the substantial developments that took place in 2012, we can reasonably predict that 2013 will be a year in which further material changes will be introduced to the Australian Transfer Pricing regime.
The starting point, a revision of the Australian transfer pricing rules as applicable to treaty-based transactions, was completed in September of 2012, when the Parliament passed into law the “first tranche” of modifications to the legislation.2
Subsequently, at the end of 2012, three substantial developments were announced which are expected to further alter the Australian transfer pricing environment during 2013:
As a result of all these developments, we expect a changing as well as challenging 2013 in respect of the Australian transfer pricing landscape, which at this stage is somewhat uncertain. We will analyze the outcome of these modifications and provide technical comments and key aspects to be considered in due course.
1For more information, please refer to LB&I Directive LB&I-4-0812-010.
2Please refer to Transfer Pricing Times, Volume IX, Issue 9, as well as “Proposed Amendments to Australia’s Transfer Pricing Rules – Rocking the Casbah?”, published in the Tax Management Transfer Pricing International Journal, May 2012.
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