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Can the Arm’s Length Standard Beat the R.A.P.? Transfer Pricing After the T.C.J.A.

Can the Arm’s Length Standard Beat the R.A.P.? Transfer Pricing After the T.C.J.A.

Experienced tax litigators know that Congress often protects the I.R.S. when an important case is lost.  Yes, the taxpayer wins.  But Congress codifies the I.R.S. position by an amendment to the law.  The T.C.J.A. revised Code §482 legislatively, thereby reversing Tax Court decisions in the Amazon and Veritas cases that dismissed two arguments raised by the I.R.S. in transfer pricing litigation – mandatory use of aggregate basis of valuation (grouping of intangibles for valuation purposes) and the realistic alternative principle (challenging the business judgment for the transaction).  Michael Peggs and Sheryl Shah explain this attack on the arm’s length principle of taxation.

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Tax 101: Deemed Annual Royalty on Outbound Transfers of I.P. to Foreign Corporations

Tax 101: Deemed Annual Royalty on Outbound Transfers of I.P. to Foreign Corporations

U.S. tax law contains provisions that attempt to discourage the outbound migration of intangible assets including specific rules that target transfers affected through corporate inversions.  Elizabeth V. Zanet and Stanley C. Ruchelman discuss the history and current standing of those provisions, while pointing out an alternative that is currently available to limit ongoing tax liability in the context of a start-up operation.

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Tax 101: Taxation of Intellectual Property – Selected Issues Involving Corporations and Partnerships

Tax 101: Taxation of Intellectual Property – Selected Issues Involving Corporations and Partnerships

Tax 101 continues its series regarding the U.S. Federal tax considerations involving the creation, acquisition, use, license, and disposition of intellectual property (“I.P.”).  This month, Elizabeth V. Zanet and Stanley C. Ruchelman focus on I.P. held through a corporation or a partnership/L.L.C.  In particular, the not-well-understood rules regarding the sale of interests in a partnerships/L.L.C.’s owning “hot assets” are explained.  Not all gain benefits from favorable long-term capital gains tax rates.

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Amazon Makes the C.U.T. – An Important Taxpayer Win, A Reminder to Consider Transactional Evidence

Amazon Makes the C.U.T. – An Important Taxpayer Win, A Reminder to Consider Transactional Evidence

Last month, Insights reported on the Tax Court decision in Amazon v. Commr., involving the “buy-in” payment made as compensation for the right to use pre-existing I.P. in a related-party cost-sharing arrangement (“C.S.A.”).  This month, Michael Peggs comments on the lessons learned from the taxpayer victory in that case regarding (i) the transfer pricing method used, (ii) the assumptions made and analyses used to value the buy-in payment, and (iii) the correct treatment of intangible development costs within the term of the C.S.A.

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Economic Nexus Through Ownership and Use of Intellectual Property

Economic Nexus Through Ownership and Use of Intellectual Property

For many tax advisers outside the U.S., state corporate income tax is viewed simply as an add-on to the Federal tax.  This relatively simplistic view ignores the requirements of U.S. Federal and Constitutional law that an activity must have a connection – called a nexus – to a state before tax can be imposed on profits allocated to the state.  Alvan L. Bobrow of Akerman LLP in New York explains the concept of “economic nexus,” a way by which digital activity within a state may trigger exposure to state tax.  Companies that license marketing intangibles should be particularly wary.

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Tax 101: Taxation of Intellectual Property – The Basics

Tax 101: Taxation of Intellectual Property – The Basics

This month, Tax 101 presents an overview of the basic U.S. Federal tax considerations of transactions that occur over the life cycle of intellectual property (“I.P.”) – from its creation to its acquisition, exploitation, and ultimate sale in a liquidity event.  The article address several important questions: Should expenditures be capitalized or deducted?  If capitalized, over what period is the expenditure amortized?  How are acquisitions of I.P. reported to the I.R.S. when an entire business is acquired?  What is the character of gain on sale?  When is a sale treated as a license?  And when is a license treated as a sale?  Elizabeth V. Zanet and Stanley C. Ruchelman explain.

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Tax Concerns on Outbound I.P. Transfers: Pitfalls & Planning in Light of I.R.S. Defeat in Amazon Case

Tax Concerns on Outbound I.P. Transfers: Pitfalls & Planning in Light of I.R.S. Defeat in Amazon Case

In the 21st century, the method of apportioning income from intangible property (“I.P.”), between the various jurisdictions in which the I.P. is developed, owned, and used or consumed, is contentious.  This was evidenced in a recent Tax Court case, Amazon.com, Inc. & Subsidiaries v. Commr., which dealt with transfer pricing rules applicable to an outbound transfer of I.P. and a related cost sharing agreement.  Philip R. Hirschfeld discusses the case in the context of Code §367(d), which relates to outbound transfers of I.P., and Treas. Reg. §1.482-7, which addresses qualified cost sharing agreements.

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International Practice Unit: License of Intangible Property from U.S. Parent to a Foreign Subsidiary

Christine Long explains how I.R.S. examiners are encouraged to determine whether foreign subsidiaries are paying fair compensation for using I.P. owned by U.S. parent companies.

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International Practice Unit: Deemed Annual Royalty Income Under Code §367(d)

Christine Long delves into the world of I.P. contributions to foreign subsidiaries. She explains how Code §367(d) works and how the regulations have been revised recently to attack goodwill and going concern contributions.

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Taxpayers Take Note: I.R.S. Publishes Audit Guides for International Examiners

U.S.-based companies facing an I.R.S. examination of international operations may secretly wish to obtain an advance look at how I.R.S. examiners plan to carry out the examination. After all, what better way to prepare for a test than to get the questions in advance? Surprise – the Large Business & International (LB&I) Division of the I.R.S. has published its training guides for examiners.

LB&I is responsible for examining tax returns reporting international transactions, and it is in the process of revising the method by which returns are chosen for examination and the the process by which those examinations are conducted. Several aspects of the guidance will be addressed through out this edition of Insights. Stanley C. Ruchelman explains.

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A Proposed Treatment For H.T.V.I.

H.T.V.I. has been singled out as being one of the leading causes of base erosion and profit shifting (“B.E.P.S.”). Michael Peggs, co-head of the transfer pricing practice of Ruchelman P.L.L.C., makes a valiant attempt at explaining a method to value intangible property that is “hard to value” while being compliant with the B.E.P.S. Action Plan. He suggests a combination of common sense and reliable data.

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Shifting Income and Business Operations

volume 2 no 4   /   Read article

By Stanley C. Ruchelman and Kenneth Lobo

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report discovers that a better tax result is obtained when income is booked in low tax countries. Stanley C. Ruchelman and Kenneth Lobo explain.  See more →

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Competitiveness of the U.S. Tax System

volume 2 no 4   /   Read article

By Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. The report compares the U.S. tax system with the systems of other countries. Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah explain what the J.C.T. staff believes. It is not pretty.  See more →

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Proposed Legislation for Italian Patent Box Regime

Currently. the O.E.C.D. and E.U. are finalizing new rules for the design of acceptable tax regimes for intangible property (“I.P.”) box companies – a tax benefit that is seen by the E.U. as a form of illegal state aid. Germany, France, Spain, and Italy are seen as the champions of the new regulations. However, Italy recently introduced its own I.P. tax incentive plan, known as a “patent box regime.” Stanley C. Ruchelman and Kenneth Lobo examine Italy’s incentive program, in light of the O.E.C.D. and E.U. attacks on such regimes.

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B.E.P.S. Actions 8, 9 & 10: Assuring that Transfer Pricing Outcomes are in Line with Value Creation

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On December 19, 2014, the Organisation of Economic Co-operation and Development (“O.E.C.D.”) released a discussion draft on Actions 8, 9, and 10 of the Base Erosion and Profit Shifting (“B.E.P.S.”) Action Plan (“Discussion Draft” or “Draft”). Actions 8, 9, and 10 reinforce the goal of assuring that transfer pricing outcomes are in line with value creation.

In July 2013, the O.E.C.D. published the B.E.P.S. Action Plan for the purpose of establishing a comprehensive agenda to resolve B.E.P.S. issues. The B.E.P.S. Action Plan identifies 15 actions to combat B.E.P.S. and establishes deadlines for application of each action.

The Discussion Draft introduces revisions to Chapter I of the Transfer Pricing Guidelines and addresses the related topics in Actions 8, 9, and 10. Specifically, the Discussion Draft focuses on the development of the following:

(i) rules to prevent B.E.P.S. by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation.

(ii) rules to prevent B.E.P.S. by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterized.

(iii) transfer pricing rules or special measures for transfers of hard-to-value intangibles.

Action Item 8: Changes to the Transfer Pricing Rules in Relation to Intangibles - Phase I

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INTRODUCTION

Unlike some of the other B.E.P.S Action Items, Action Item 8 has a basis in existing O.E.C.D. rules. In this regard, the O.E.C.D. Transfer Pricing Guidelines41 have established the operating rules for transfer pricing. It is understandable that Action Item 8 merely presents a series of amendments to Chapters I, II, and VI of the O.E.C.D. Guidelines.

Action Item 8 states that it seeks to:

  • Clarify the definition of I.P.,
  • Provide guidance on identifying transactions involving I.P., and
  • Provide supplemental guidance for determining arm’s length conditions for transactions involving I.P.

Action Item 8 also considers the treatment of local market features and corporate synergies.

Current Tax Court Litigation Illustrates Intangible Property Transfer Pricing and Valuation Issues

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MOVING INTANGIBLE PPROPERTY ASSETS OVERSEAS PRESENTS BOTH BUSINESS AND TAX ISSUES

The movement of intangible property (“I.P.”) offshore by U.S. multinational corporations has always been subject to high levels of I.R.S. scrutiny. This remains true in the current tax environment. It is a given that U.S. multinational companies are subject to a high level of U.S. corporate income tax at federal and state levels and their non-U.S. business operations are typically subject to lower tax rates abroad. As a result, U.S. multinationals can lower their global tax expense by transferring I.P. to an offshore subsidiary company (“I.P. Company”), when it is appropriate and consistent with the conduct of their international business operations.

In a typical arrangement within a group, the I.P. Company licenses the use of the I.P. to other members. Royalties paid by the other group members (including the U.S. parent, if total ownership of the I.P. is assumed by the I.P. Company) is claimed as a deduction in the tax jurisdictions of each member that is a licensee. If an I.P. Box Company arrangement is in place or a special ruling obtained, the royalties received by the I.P. Company will be subject to a low tax rate. Assuming that arrangements are in place to remove the royalty income from the category of Foreign Personal Holding Company Income for purposes of Subpart F, the net result is reduced tax for book and tax purposes. This yields greater profits for the multinational group and increased value for its shareholders.

Two cases that are currently in litigation illustrate the I.R.S. scrutiny given to transfers of I.P. to an I.P. Company and the resulting U.S. tax issues that are encountered. The cases involve Zimmer Holdings and Medtronic.

New York Estate Tax on Real & Intangible Property - When Intangibles Become Tangible

Published by the American Bar Association in the Real Property Trust & Estate eReport, February 2013.

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