“Implicit support” comes charging out of the gates as an early candidate for Word or Phrase of the Year for 2024. 

Before year’s end, the IRS Office of Chief Counsel dropped a new generic legal advice memorandum (“GLAM”), AM 2023-008, titled “Effect of Group Membership on Financial Transactions under Section 482 and Treas. Reg. § 1.482-2(a).” The GLAM visits some familiar territory, including the “realistic alternatives” principle, this time in the intracompany lending context.  

Continue Reading Happy New Year.  Here’s a GLAM on Implicit Support.

In a recent case, Villa-Arce v. Commissioner,[1] a whistleblower sent information to the IRS that he believed showed that the company was using improper transfer pricing practices and taking unjustified deductions. The IRS opened an examination that resulted in other adjustments, but none based on the information from the whistleblower. For that key reason, the D.C. Circuit affirmed the Tax Court decision that the whistleblower was not entitled to an award for the collection of proceeds from the unrelated adjustments. Yet while the whistleblower walked away empty-handed, the case illustrates a unique type of transfer pricing and audit risk that comes from whistleblowers that companies should recognize. And given the indefinite nature of transfer pricing and the potential amount of dollars at stake, we will likely see more whistleblower actions involving transfer pricing.

Continue Reading Blowing the Whistle on Transfer Pricing

Last week, the IRS released a mysterious new audit “campaign” that may implicate – inadvertently or otherwise – transfer pricing practices. The campaign, which was announced on August 8, is simply entitled “Inflated Cost of Goods Sold.”   

The only glimmer of explanation the IRS gives as to what exactly this is all about is the brief statement that the campaign “focuses on LB&I taxpayers that have indications of inflated Cost of Goods Sold to reduce taxable income.”

But this tells us very little. Absent book-tax differences (e.g., FIFO/LIFO materials inventory conventions), an increase in COGS will always decrease taxable income. This is hardly revelatory. Two old IRS practice units from 2014 (“Purchase of Tangible Goods from Foreign Parent – CUP Method” and “Sale of Tangible Goods from a CFC to USP – CUP Method”) recognize the truism that increasing COGS reduces taxable income. So what? What facets of COGS gives the IRS concern? Direct Labor? Overhead? Standard Material Costs? Variances?

Continue Reading Compliance Campaign: COGS Cops Coming
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In a recent case, the IRS sued a corporate taxpayer in district court for supposedly unpaid taxes—without issuing a notice of deficiency first. The taxpayer claimed that this move was improper, but the district court sided with the IRS. In an opinion issued in June, the court held that the deficiency process is essentially optional for the IRS.

Continue Reading Liberty Global and the Burden of Proof
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In Moore v. U.S., Mr. and Mrs. Moore challenge the constitutionality of the transition tax under § 965. The Moores ask the Supreme Court to reaffirm a realization requirement for income taxable under the Sixteenth Amendment. The Moores argue that this realization requirement applies to § 965 and that §965, as a tax on unrealized gain, is unconstitutional. In contrast, the government argues that the transition tax is a permissible extension of tax regimes like Subpart F that already tax undistributed corporate earnings. (See our recent client alert on the case generally.)

A ruling on the realization requirement bears on whether Pillar Two might be constitutional in the United States. Specifically, a ruling that § 965 does not comply with a realization requirement, if not suitably cabined, could imperil the ability of the U.S. to implement Pillar Two legally, because Pillar Two might be viewed as similarly not complying with the realization requirement.  

Continue Reading Moore and Pillar Two: Possible Interactions
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Today, the Supreme Court decided to hear a case that could have wide-ranging implications on US taxation of income earned abroad. The case challenges a key international provision in the Tax Cuts and Jobs Act: the Section 965 transition tax. The case has attracted attention (including multiple Wall Street Journal writeups) for its potential impact on Biden’s proposal to impose a wealth tax on high-income Americans. But the case is also of interest to the corporate tax community.

Continue Reading Moore Money, Moore Problems

Mayer Brown announced today that Sonal Majmudar, former international tax counsel with the Internal Revenue Service (IRS), joined its Tax practice as a partner. Sonal will be resident in the firm’s Washington DC office. Her arrival bolsters Mayer Brown’s market-leading, global tax offerings, particularly with regard to transfer pricing controversies and high-stakes international disputes.

On April 25, 2023, the IRS’s Advance Pricing and Mutual Agreement (“APMA”) Program issued new interim guidance for its review of taxpayer Advance Pricing Agreement (“APA”) requests. Notably, the guidance introduces an “optional pre-submission review” for taxpayers that wish to submit a prefiling memorandum before submitting a formal APA request. Based on the pre-submission review, APMA will give a preliminary opinion whether it believes that an APA is well-suited to achieve tax certainty for the proposed covered transactions. The new interim guidance also instructs APMA personnel on how to review formal taxpayer APA requests for acceptance to the program, or whether to suggest an “alternative workstream” such as the International Compliance Assurance Program (“ICAP”)[1] or a joint audit. 

Continue Reading APMA’s New Interim APA Guidance

This week, the FASB issued an amendment to a previously proposed Accounting Standards Update that would, if approved, “enhance the transparency” of public companies’ reporting of income taxes paid. FASB Accounting Standards Update (ASU) No. 2023-ED100.  In doing so, FASB seems to make a baby step toward embracing CbC reporting for book purposes.

Continue Reading Transfer-parency Pricing: New FASB Proposal

On February 1, 2023, the OECD Forum on Tax Administration published its Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements. (“Multilateral MAP and APA Manual” or the “Manual”). The Multilateral MAP and APA Manual provides new guidance to both tax administrations and taxpayers on how both multilateral MAPs and APAs can be negotiated and implemented under existing bilateral tax treaties in circumstances where a double tax issue cannot be adequately resolved without involving one or more third jurisdictions. The Multilateral MAP and APA Manual is similar in some ways to the Bilateral Advance Pricing Arrangement Manual (“Bilateral APA Manual”) that the OECD published in September 2022, which was the subject of a prior blog post. However, whereas the Bilateral APA provided specific, detailed, best practices to tax administrations and taxpayers reflecting decades of experience within a well-established process, the Multilateral MAP and APA Manual aims to provide a more basic awareness of how multilateral MAPs and APAs can be negotiated and implemented in appropriate cases.

Continue Reading OECD’s New Multilateral MAP and APA Manual Adapts Bilateral Processes for a Multilateral World