Transfer Pricing Times: Volume XII, Issue 9

In this Edition: New Regulations Seek Improved Coordination within IRS Code. 

On September 14, 2015, the U.S. Treasury released two pieces of guidance that are important revisions (in proposed or temporary form) associated with pricing of intangible transfers. Specifically, these revisions relate to Sections 482 and Section 367 of the Internal Revenue Code (the Code). These revisions are intended to prevent certain behaviors that the Internal Revenue Service and Treasury perceived as being abusive as it relates to pricing such transfers. The changes in regulations under Section 367 (if enacted) and Section 482 would, together, have the effect of:

  • Making substantially all intangibles subject to either Section 367(a) or Section 367(d), and therefore subject to gain recognition by: Limiting the application of the Active Trade or Business exception to Section 367(a) to a short list of assets which are largely tangible assets or financial assets.
  • Eliminating the exception for foreign goodwill and going concern in the application of Section 367(d).
  • Requiring aggregation of transactions more broadly than the existing regulations for pricing purposes, and eliminating the potential to disaggregate interrelated transactions for pricing purposes because they are subject to different sections of the tax code given the nature of the transfer.

Broaden the definition of useful life in Section 367(d) and eliminate the 20 year ceiling in the current Section 367(d) regulations. The changes to relevant regulations under Section 482 (which largely relate to the aggregation point) are effective as of September 14th, 2015.  Full text of the new temporary regulations  under Section 482 is available here. The proposed changes to regulations under Section 367 are not yet effective, and Treasury is soliciting comments on the proposed revisions. It should be noted, however, that the proposed regulations state that they will be effective as of September 14, 2015. Therefore, if the proposed regulations were adopted at some future point in their current form, these provisions would potentially apply retroactively to September 14, 2015. Full text of the proposed regulations under Section 367 is available here.

IRS Purports Coca-Cola Owes Over $3.3 Billion in Underpaid Taxes

On September 17, 2015, Coca-Cola Co. (Coca-Cola) received a Statutory Notice of Deficiency (the Notice) from the IRS for the tax years 2007-2009, asserting an adjustment of $3.3 billion plus interest for the underpayment of taxes. The Notice comes at the conclusion of a five-year audit. In its Form 8-K filed with the Securities and Exchange Commission, the company stated that the dispute largely relates to the amount of taxable income the company should report in the U.S. in connection with out-licensing of intangible property to certain foreign affiliated licensees regarding the manufacture, distribution, sale, marketing, and promotion of products in non-U.S. markets. According to a public statement from the company, the IRS has recommended the matter for litigation. Coca-Cola plans to file a petition in the U.S. Tax Court. For more information, see the September 18, 2015, Form 8-K released by Coca-Cola, available here.

IRS Implements Final Changes to Competent Authority Process

On August 12, 2015, the IRS issued Rev. Proc. 2015-40, revising the procedures for obtaining competent authority (CA) assistance concerning issues arising under U.S. income tax treaties. This revenue procedure replaces the previous guidance, which was last updated nearly ten years ago.

A copy of the revised guidance is available here.

Australia Proposes to Implement BEPS Action Plan and other Transfer Pricing Legislation into National Law

Draft legislation has been introduced in the Australian Parliament that intends to implement Action 13 of the OECD’s BEPS Action Plan into national law. Specifically, Action 13 lays out a three-tiered approach to transfer pricing documentation and includes country-by-country (CbC) reporting. If the law is enacted, elements of Action 13 would be in effect as of January 1, 2016, and would apply to Australian resident companies or foreign residents with an Australian permanent establishment, assuming total group annual revenue exceeds one billion Australian dollars.

In addition, draft legislation has been introduced to amend general anti-avoidance provisions in current tax law to explicitly include benefits arising from overly aggressive avoidance of permanent establishment status. If passed, the provision enables the Tax Commissioner to negate such tax benefits by issuing an assessment based on the profit that would be attributable to a PE, plus a penalty equal to 100 percent of the tax owed.

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