Transfer Pricing Deals to Get Special Scrutiny After Inversions

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

July 6 — Transfer pricing deals are among post-inversion transactions IRS agents should be closely scrutinizing, the agency said in a newly posted audit guide.

At a time when the agency is in the midst of a crackdown on inversions, the new international practice unit calls for agents to put both these transactions and the tax planning that happens afterwards under the microscope.

Paul Schmidt, tax group chair at BakerHostetler LLP, called the guide a “road map” for auditing inversions. In a July 6 interview, he said the Internal Revenue Service hasn't yet highlighted transfer pricing transactions as a target for scrutiny following the deals in such a specific, public way.

Risk Movement Scrutinized

The document ( ISO/CU/P_1.10_01(2014)) calls for agents to look at post-inversion changes in transfer pricing relationships—such as deals to move U.S. business risks offshore—that attempt to cut taxable income.

In addition to transfer pricing, the guide tells agents to look at:

  •  earnings stripping;
  •  deals to use the offshore cash of controlled foreign corporations in ways that escape U.S. tax;
  •  efforts to change who controls a CFC—a practice known as “de-controlling”—for tax purposes;
  •  transactions that “dilute” the ownership of foreign subsidiaries; and
  •  deals where a U.S. corporation, now owned by a foreign parent, tries to move its CFCs “out from under” the U.S. ownership structure.

The scrutiny of some of these issues is only likely to increase in coming months. The IRS said it would issue separate practice units to address post-inversion loan issues, “out from under” CFC planning, and earnings stripping.

Insight for Taxpayers

The guide not only serves as a training manual for agents, but can offer a spotlight for taxpayers, according to Joe Calianno, partner and international technical tax practice leader at BDO USA LLP.

“It does give you some insight into what agents are supposed to be looking for,” Calianno said in a July 6 interview. “It walks you through the issues that they're going to be considering.”

He said he believes with any audit involving an inversion transaction or the planning that happens afterwards, it is likely that the field office will be closely coordinating with the national office on technical issues.

Is It Enough?

John Harrington, a partner with Dentons US LLP, said while the document serves as a broad overview of inversions issues, it likely wouldn't be enough on its own to steer agents through the complex web of guidance the IRS has issued over the past two years as part of the administration's crackdown on inversions.

“The rules have changed over time and you can see the difficulty of explaining that to auditors,” Harrington told Bloomberg BNA July 6. While it is obvious the IRS is trying to make the issues as clear as possible in a broad overview, he said, it is not an easy topic to simplify.

The document is “almost 50 pages and truly just scratching the surface,” he said. “This is not enough for an agent to feel comfortable saying, ‘I've got the inversions rules down, I can go from here.' ”

To contact the reporter on this story: Alison Bennett in Washington at

To contact the editor responsible for this story: Brett Ferguson at

For More Information

Text of ISO/CU/P_1.10_01(2014) is available at

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