Inbound Distributors Target of IRS Transfer Pricing Campaign

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing. 

By Alison Bennett

June 9 — The Internal Revenue Service has launched a “campaign” targeting possible transfer pricing noncompliance by inbound distributors, an official said—the first word on a specific campaign under a new structure for the Large Business & International Division.

These efforts are part of a new concept in LB&I, involving teams of people gathered to work on specific issues where the agency has identified compliance risks.

Cheryl Teifer, director of field operations for the IRS Transfer Pricing Practice, said June 9 the agency is conducting a campaign looking at inbound distributors in five states, with that number expected to grow to 10 states by the end of the year. In general, these are U.S. distributors of a foreign parent's goods. The pricing of those goods is under scrutiny by the IRS.

Speaking at a transfer pricing conference sponsored by Bloomberg BNA and Baker & McKenzie LLP, Teifer said the IRS is also working on campaigns separately addressing basket options and captive insurance, and is considering a number of other areas for transfer pricing-related campaigns.

Basket Options, Captive Insurance

Basket options are a type of financial derivative where the underlying asset is a “basket,” or group, of commodities, securities or currencies. A captive insurer is owned by its “insured” and its function is to insure their risks. Those owners benefit from the captive insurer's underwriting profits.

As the agency starts work on its campaigns, it's possible one tax return could be the subject of more than one campaign simultaneously, according to Sharon Porter, IRS director of treaty and transfer pricing operations within LB&I. “The idea is not to do these sequentially,” she said. “There may be a time when an issue is so significant and it's found late that it could be the subject of a second campaign.”

`Appropriate' Resolution a Goal

However, she said in response to questions from Michael Bernard, Microsoft Corp. chief tax counsel, that “we don't always look at a campaign as a series of audits” and the goal is to resolve cases at the “appropriate” level, whether that is a settlement, an audit, or something else.

On another issue, Porter said the IRS is planning to shrink the number of companies in its Coordinated Industry Case program for the nation's largest corporations and will reach a decision “sometime this summer” about which companies won't be in the program anymore.

“We're always going to have some taxpayers that we'll always have under continuous audit,” Porter said, but LB&I wants to move away from audits based on company size to audits based on issues that present risk.

She stressed however, if IRS decides to take companies out of the CIC, it will issue a formal letter to tell them about it. “We're moving quickly, she said. “We've been working on it for a while.”

Future of Real-Time Issue Program Unclear

In answer to questions, Teifer said the IRS is still considering the future of the Compliance Assurance Process, a program that allows the agency and big companies to try to resolve issues before a tax return is filed.

She said the program is under a review to determine “how it fits into our vision” of a division based around centralized issue selection.

The agency sees “a lot of benefits to working with our large taxpayers to identify emerging issues in real time,” but decisions have yet to be made, Teifer said. “Stay tuned.”

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com