Friday, June 3, 2011

International Tax Judge Group To Meet in Rome

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As nations claw their way out of the global economic crisis, revenue-seeking governments have an increasing interest in erasing national borders--at least when it comes to shedding some light on the activities of large multinational corporations--through more robust exchange of information.

In the midst of this change, some multinational companies are braving the uncertainty inherent in litigating high dollar tax disputes, such as transfer pricing, in the hopes that it will achieve some certainty in its operations in other countries. This brings us to the tax judges, who appear to be readying themselves for the change as well. Last year, the OECD's Centre for Tax Policy and Administration hosted an international tax seminar for judges, which was attended by more than 45 judges from 25 countries.

An outgrowth of the OECD meeting was the International Association of Tax Judges, which will hold its first assembly in Rome Aug. 27-28.The judges will discuss differing approaches to tax dispute resolution around the world as well as recent developments in international tax law, including: transfer pricing, permanent establishment, and treaties.

Educating judges on complicated transfer pricing and other international tax issues is a welcome effort. But while many emerging economies and developing nations will look to the major trading countries' systems as the goal, they also will want to learn from their mistakes. Take the United States, for example. The IRS was embroiled in litigation with Xilinx Inc. for nearly a decade over whether the company must cost share R&D employee stock options with its Ireland subsidiary. After an IRS loss in Tax Court, the U.S. Court of Appeals reversed the decision. Following numerous briefs from former IRS officials and other tax practitioners supporting Xilinx's petition for rehearing, the Ninth Circuit withdrew its decision.

Two months later, the Ninth Circuit re-issued a ruling that achieved the Tax Court's result while appearing to resolve two conflicting portions of the cost sharing regulations--the arm's-length standard and the definition of intangibles development costs. During this time, the IRS had changed the cost sharing regulations (2005) and issued a coordinated issue paper (2007), some of which it used to buttress its arguments in the case, which dealt with the cost sharing regs in place for 1997-99.

Akin to a washed-up boxer beaten to a pulp who gets in a punch after the bell, the IRS issued an action on decision in the Xilinx case. The AOD said the Service "acquiesced" with the Ninth Circuit's result, just not with the reasoning. The AOD made clear that the IRS was limiting the ruling's application to the regulations during the years at issue. In addition, another Tax Court case on cost-sharing buy ins recently lost by the IRS, Veritas Software Corp. v. Comr., similarly rejected the IRS's approach in cost sharing regulations it issued after the tax years in dispute.

Clearly, judges in countries with international tax regimes both fledgling and mature can learn a lot from the royal mess that is the U.S.'s cost sharing litigation.

Details on the International Association of Tax Judges August meeting, which will be held just prior to the International Fiscal Association Congress in Rome, appear at: http://www.ifa.nl/Document/Congress%20Rome/IATJ2010PromotionPageRegForm.pdf 

--Tamu N. Wright, BNA Tax Management Transfer Pricing Report  

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