IRS renews interest in transfer pricing

BVWireIssue #83-2
August 12, 2009

The current recession has eroded the corporate and consumer tax base.  “From a public policy perspective, this creates the formidable challenge of balancing the need to increase Federal tax revenues while ensuring that corporations do not face exorbitant tax expenses, and that individuals have the disposable income available to increase the all-important consumer spending metric,” says David R. Jarczyk, a director and the head of research for Ceteris (New York) in a Special Report to the Business Valuation Update.  “One way of decreasing the political ramifications of increasing tax revenues is to focus on transfer pricing, which (in theory at least) implies that increases to the U.S. tax base would come not at the expense of U.S. corporations or individual taxpayers, but at the expense of the tax bases of foreign tax administrations.”  Consider these supporting facts, Jarczyk says:

  • The White House weighs in. In recent testimony before the Senate Finance Committee, the Director of the White House’s National Economic Council noted the gap from non-compliance with the tax code could reach $751 billion annually by 2015. In particular, “There are also important issues and abuses associated with transfer pricing…that require Congressional attention. I am convinced that substantial revenues can be obtained from these sources.”  (Emphasis added)
  • IRS reaffirms its focus. More recently, IRS Deputy Commissioner for Services and Enforcement stated: “International issues are, and will continue to be, an area of major strategic focus for the IRS.  [We] cannot allow an environment to develop where wealthy individuals or companies can go offshore and avoid paying taxes with impunity.”  The financial crisis has only served to sharpen the agency’s focus on international tax compliance, including aggressive moves to address transfer pricing.
  • New agency hires. The IRS recently announced that it would hire more than 3,500 frontline enforcement employees, including more than 2,000 new revenue agents and officers, of which several hundred will focus on international issues.

For a complete round-up of transfer pricing issues and the role of the accounting expert, including making sure that documentation meets the regulatory requirements and conducting a “second look” review, see Jarczyk’s full report in the next (September 2009) Business Valuation Update™.

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