Overcoming the Challenge

Transcription

1 TAX Overcoming the Challenge Transfer Pricing Dispute Resolution Services kpmg.com

2 2 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services Given the importance of this issue to the tax system, we will continue to focus on transfer pricing in the years to come. Excerpt from IRS Commissioner Doug Shulman s remarks before the 23rd Annual Institute on Current Issues in International Taxation, Washington, DC, December 9, 2010

3 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services 3 Today s multinational companies must contend with a tax environment unlike any in history. Diverse local, national, and international tax systems often reflect a lack of symmetry, archaic laws, and constant change. In the transfer pricing arena, tax authorities from virtually every major market have instituted their own rules, and have intensified their scrutiny of transfer pricing issues to claim their share of tax revenues. A similar landscape exists for U.S. companies with state-to-state operations. The result is increased transfer pricing exam disputes.

4 4 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services More than ever before, taxpayers need to have an effective strategy for responding to transfer pricing inquiries that can lead to tax adjustments, penalties, interest charges, and even negative publicity. Transfer pricing inquiries can also be extremely time consuming and involve a commitment of resources for assembling paperwork, preparing responses to detailed inquiries, and corresponding and negotiating with tax authorities. The good news is that a variety of options exists to help taxpayers overcome transfer pricing challenges. Defending challenges at the local level often results in satisfactory settlements. IRS programs, such as Fast Track mediation and Advance Pricing Agreements (APAs), offer alternate dispute resolution paths. Competent authority assistance frequently results in full double taxation relief. KPMG Can Help To help companies prevent, prepare for, and respond to challenges by varying tax authorities, KPMG LLP has formed the Tax Dispute Resolution network. This network is a national team of professionals from all areas of tax who assist clients in identifying, managing, and mitigating potential tax risks and exposures. The Transfer Pricing Dispute Resolution (TPDR) component of the network helps taxpayers resolve disputes and respond to challenges that come with transfer pricing controversy, whether related to intercompany pricing between the United States and other countries or between U.S. states. Our professionals can assist clients in determining which dispute resolution approach fits each specific situation, providing robust economic analysis in support of existing transfer prices, preparing strong responses to detailed inquiries, and supporting negotiations with the IRS. KPMG s TPDR professionals are senior-level economists and tax practitioners with years of dispute resolution experience, and many have worked for the IRS. These skilled professionals have served clients in a variety of industries and geographies. By listening to your questions and understanding your needs, we contribute where we can add the most value. Combining this tailored approach with a mindset that is both global and forward thinking, we can help you resolve transfer pricing disputes that are specific to your business.

5 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services 5 Adjustments when there are consolidated losses A hypothetical taxpayer states, I have suffered losses in both the United States and abroad due to a sharp drop in the demand for my products. Nevertheless, the IRS has proposed a significant transfer pricing adjustment that is forcing me to report positive profits, arguing that you are in business to make money. Determining the best way to address this difficult issue requires knowledge of IRS policy and people, an understanding of different procedural options and how they change the way in which the IRS approaches settlements, and the ability to develop and implement economic analyses that support the arm s-length standard while also having a chance of being accepted by the IRS. KPMG brings together a group of professionals, including individuals who had worked as IRS Counsel before joining KPMG, who know IRS procedures, and who have successfully presented economic analyses in difficult exams and administrative appeals. KPMG Services Our approach to seek a quick resolution to an organization s transfer pricing disputes includes conducting a thorough due diligence to better understand the nature of the dispute, analyzing all background information received, and working closely with the client to determine a suitable approach to resolve disputes with tax authorities. TPDR professionals can help organizations in a variety of areas. Transfer pricing exams Provide options for approaching exams Conduct risk assessments and mock exams Review Forms 5471 and 5472 a current area of IRS focus where transfer pricing plays an important part in what s reported Assist at the examination level, helping you respond to Information Document Requests (IDRs) and other requests for information Assist with assembling information and analyses that may support the contemporaneous documentation requirements in cases where there are no formal reports Provide supplementary economic and regulatory analysis as necessary Responding to IDRs It is IRS policy to ask taxpayers with potential transfer pricing issues for contemporaneous documentation. This mandatory request is generally made on one of the first IDRs that is issued. In many cases, taxpayers have prepared either internally or through a professional services firm a formal contemporaneous transfer pricing study that is ready to be turned over to the IRS. Prior to responding to the IDR, however, it is important to review this study to verify that it has all the required elements listed in Treas. Reg (d)(2)(iii)(B) and covers all transactions at issue as well as to determine whether any additional information may be required. Taxpayers that have not prepared such documentation perhaps because they think that their transfer pricing is clearly supported by arm s-length data or because their intercompany transactions are too small to justify the expense of a formal study should review their files to determine whether they can in fact respond to each of the formal section 6662 requirements with information that was in existence at the time that they filed their tax returns. Such taxpayers may also want to consider preparing noncontemporaneous analyses that show why their transfer pricing is consistent with 482 requirements. While such a study does not provide penalty protection, it may play a key role in persuading the IRS that the transfer pricing was correct.

6 6 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services When to consider Fast Track One of the most common problems in dealing with the IRS is the time that it takes to resolve cases. Not only is this a continual drain upon the resources of the taxpayer, but there may also be substantive financial statement uncertainties, particularly if the issue is one that continues into the years following the initial examination. Taxpayers looking for an option that offers the possibility of a quick resolution to a difficult transfer pricing issue may want to consider Fast Track settlement. In Fast Track, the issue is assigned to a specially trained Appeals Mediator, who works with the government and the taxpayer, to resolve the matter. The issue stays within the jurisdiction of the examination team, but by bringing in a mediator, the parties may resolve the issue outside of traditional examination constraints. Under the Fast Track guidelines, the process is limited to 120 days from start to finish, thereby allowing for an expeditious resolution.

7 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services 7 Decision to go to competent authority The U.S. competent authority is generally very effective in providing relief from double taxation. According to IRS statistics, approximately 90 percent of all cases brought to competent authority are resolved today with complete, or at least partial, relief from double taxation. However, taxpayers can have a wide range of objectives in seeking competent authority relief, ranging from a simple assurance that they will ultimately get relief regardless of the specific outcome of the competent authority negotiations, to a desire for a quick resolution that will reduce uncertainty, to the desire for a very specific outcome from the competent authority process. A clear understanding of the taxpayer s ultimate objectives in terms of obtaining double tax relief is important, not just in determining how the taxpayer will approach the competent authority process but also in how the taxpayer will approach the exam and appeals process. Decisions that are made in the early negotiations with the IRS may affect the type and quality of the case that is taken to competent authority. Appeals and alternative processes Prepare responses to Forms 5701, Notices of Proposed Adjustment File protests to Appeals (upon receipt of 30-day letter) and represent clients before the Appeals Division Represent clients in available Alternate Dispute Resolution processes, such as Fast Track settlement, mediation, and arbitration APA process Develop economic approaches to resolving transfer pricing issues through the APA process Assist with negotiating unilateral, bilateral, or multilateral APAs (new and renewals), including coordinating the APA process with tax authorities in non-u.s. jurisdictions Assist with the APA annual reporting and compliance requirements Help resolve transfer pricing disputes by applying, if possible, the APA transfer pricing methodology to back years (rollbacks) Use the APA process to resolve transfer pricing related issues (such as determining the amount of income effectively connected with a conduct of the U.S. trade or business) Competent authority process Request competent authority assistance to resolve double taxation issues involving both the IRS and foreign initiated adjustments Request accelerated competent authority assistance to resolve the issue for prior years (not just for the years in which a formal adjustment has been raised) Identify situations requiring certain protective measures and undertaking the necessary steps to preserve the taxpayer s right to relief under the applicable mutual agreement procedure

8 8 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services Our people The TPDR group delivers a multidisciplinary approach to transfer pricing and risk management issues. The group includes former IRS Chief Counsel professionals who litigated transfer pricing matters while with the IRS, a cadre of economic professionals encompassing more than 100 economists with advanced degrees including approximately 30 with PhDs, and seasoned international corporate tax professionals with extensive experience in intercompany transfer pricing planning. For companies with operations outside of the United States, TPDR professionals draw on the global resources of KPMG member firms to deliver services that align with a client s global structure, as well as its tax and business objectives. KPMG s professionals know the right questions to ask and can help you choose and develop an appropriate approach. Moreover, they ll offer the support you need whenever you need it and, as a result, help you reduce costs and save time. KPMG professionals act with integrity and are globally minded and collaborative. The insights they offer help you understand the impact that decisions now may have in the future not only to be effective in the short term, but also to build long-lasting positive results.

9 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services 9 Below are some of the key members of the TPDR team and a brief description of their specialties and experience. Contact your KPMG adviser or any of these professionals for more information about KPMG s Tax Dispute Resolution network and our Transfer Pricing Dispute Resolution Services. TPDR Leadership Team The TPDR leadership team consists of professionals with extensive experience in resolving transfer pricing disputes. The categories set forth below highlight their primary areas of experience. Sean F. Foley, Principal [email protected] Washington, DC Sharon-Katz Pearlman, Principal [email protected] New York Clark Chandler, PhD, Principal [email protected] Washington, DC Thomas Zollo, Principal [email protected] Chicago Brian P. Trauman, Principal [email protected] New York Erin M. Collins, Managing Director [email protected] Los Angeles Paul Webb, Director [email protected] Silicon Valley Foley is a former director of the IRS s APA Program, having joined the IRS after working for several years on international tax matters at a Washington, DC-based law firm. He focuses on APAs, competent authority matters, and transfer pricing risk management. Over his career, Foley has worked on hundreds of APAs. He brings this wealth of experience to bear to help clients craft answers for some of the most difficult transfer pricing disputes. Katz-Pearlman represents clients at all levels of their IRS disputes from the examination phase through appeals, as well as all types of alternate dispute resolutions. Formerly with IRS Office of Chief Counsel, Katz-Pearlman served as a Special Litigation Attorney for Chief Counsel s Manhattan office, and served on many litigation teams across major issues including transfer pricing. Chandler has been actively involved in transfer pricing disputes for approximately 30 years, and has provided economic analysis and testimony for both tax authorities and taxpayers in a large number of significant transfer pricing disputes at exam and appeals, in Tax Court, and in support of APAs. Zollo provides tax advice to multinational corporations and has considerable experience designing, documenting, and defending intercompany transfer pricing systems. He has more than 25 years of experience at KPMG and prior to joining KPMG at a global law firm, representing taxpayers in transfer pricing disputes at exam, before IRS appeals, and in competent authority proceedings. Trauman has experience assisting multinationals with state, federal, and foreign tax disputes and transfer pricing matters, including transfer pricing structures and supply chains, documentation, intercompany agreements, exam, appeals, litigation, APAs, and competent authority proceedings. Prior to joining KPMG, he was a partner in a global law firm and, previously, served as an attorney-advisor with the U.S. Tax Court. Collins is a former Special Trial Attorney with IRS Western Regional Counsel, where she represented the IRS in a number of major litigations. Collins works with companies to resolve tax disputes at all levels of the IRS, including exams and appeals. She also represents both foreign and domestic corporations on a wide variety of technical and procedural issues. Webb is a former Special Trial Attorney with the IRS Office of Chief Counsel, where he was responsible for litigating complex and high-profile tax cases on behalf of the government, including Xilinx, Inc. v. Commissioner. With a focus on transfer pricing and cost sharing, Webb works with companies to resolve tax controversies at all levels of the IRS, including examinations, appeals, and APAs.

10 10 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services David Chamberlain, Senior Manager Silicon Valley Steven D. Felgran, PhD, Principal New York Paul S. Manning, Principal Washington, DC Brian J. Cody, PhD, Principal Chicago William H. Quealy, Director San Diego Marc R. Alms, Managing Director New York Carolyn D. Fanaroff, Director Washington, DC Kristine K. Schlaman, Senior Manager Washington, DC Chamberlain brings five years of experience as team leader with the IRS APA Program California offices to assist multinational clients obtain flexible and robust APAs in industries ranging from technology to chemicals to apparel. Previously, he spent nearly a decade and a half as a transfer pricing and international tax adviser, focusing primarily on structuring, implementing, and defending cost sharing arrangements and other tax deferral strategies for high technology companies. Felgran has provided assistance to numerous taxpayers in resolving complex transfer pricing issues at both the examination and appeals levels. In addition, he has been the lead economist on numerous bilateral APAs and rollbacks involving the IRS and foreign tax authorities. He has more than 20 years of experience in transfer pricing analysis and dispute resolution. Manning has extensive experience advising clients in administrative tax disputes in international tax, including transfer pricing. A former IRS litigator, he was involved in the development of complex factual and international technical legal issues, as well as practice and procedure strategies, at the pre-exam, exam, appeals, and litigation levels. Cody has helped taxpayers resolve a number of difficult transfer pricing disputes at both the examination and appeals levels. In addition, he has prepared the economic analysis used in a number of APAs and has provided expert economic testimony on intercompany transfer pricing before a variety of federal and state courts. Quealy is a former Special Trial Attorney with IRS Western Regional Counsel, where he represented the IRS in a number of major litigations. Quealy works with companies to resolve tax disputes at all stages, including letter rulings, pre-filing agreements, examinations, administrative appeals, and post-appeal mediations. He also advises foreign and domestic corporations on a wide variety of technical and procedural issues. Alms has more than 10 years of experience assisting multinationals with U.S. and foreign tax disputes and transfer pricing matters, including APAs and competent authority proceedings, transfer pricing structures and supply chains, documentation, intercompany agreements, and exams. Alms was seconded to KPMG in Australia, where he gained valuable insights into transfer pricing dispute resolution in the Pacific Rim. Fanaroff advises a diverse group of clients on the IRS s APA Program, competent authority, and tax dispute resolution. Previously, during her 11-year tenure at IRS, she served as an APA team leader and drafting attorney for the transfer pricing penalty regulations and was part of a tax treaty negotiating team. Schlaman focuses on competent authority, foreign tax credit, and tax treaty issues. She is a former attorney-advisor in the Office of Associate Chief Counsel (International) at the IRS in Washington, DC. She is a coauthor of BNA Portfolio 940-2nd T.M., U.S. Income Tax Treaties U.S. Competent Authority Functions and Procedures.

11 Overcoming the Challenge: Transfer Pricing Dispute Resolution Services 11 TPDR professionals think beyond the present and look beyond borders. Using a multidisciplinary approach and extensive technical experience, our professionals can add value and help you manage transfer pricing disputes in an ever-changing business environment. Experience counts when facing a tax dispute. KPMG can help.

12 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. KPMG LLP, the audit, tax and advisory firm ( is the U.S. member firm of KPMG International Cooperative ( KPMG International ). KPMG International s member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. KPMG LLP does not provide legal services.