May 16, 2016
In September 2015, the IRS announced a reorganization of its Large Business & International (LB&I) Division that houses transfer pricing specialists. At the time, the new structure was revealed with a single deputy commissioner and nine practice areas (four regional along with these subject matter areas: Pass-through Entities, Enterprise Activities, Cross-border Activities, Withholding and International Individual Compliance, and Treaty and Transfer Pricing Operations).
In addition, the IRS is taking a new approach to exams, shifting to a campaign strategy that is issue-based, focusing on potential areas of noncompliance.
What wasn’t revealed in that announcement was that the IRS has expanded its scope to include mid-sized and smaller companies. In October 2015, David Varley, acting director of the IRS’ transfer pricing group in Washington, D.C., said that middle market foreign-owned businesses, were now included in this initiative. This project encompasses U.S.-based companies that fall within $10 million to $250 million in assets and foreign parent companies operating limited-risk distributors in the United States.
As part of this initiative, the IRS is dropping its program of differentiating its emphasis on Controlled Industry Cases (approximately the 2,500 largest most complex corporations) and Industry Cases (the remaining 240,000 corporations with assets more than $10 million) to instead focus on the international and domestic campaigns identified above. We have already seen an increased IRS presence on international issues on smaller entities.
While there hasn’t been a formal announcement that the IRS is targeting smaller companies in this project, it has been shared in meetings with IRS personnel. It is also known that the IRS has been hiring economists to increase the enforcement team. This means relatively small companies, even those with less than $100 million of global revenue, can expect additional IRS scrutiny on their transfer pricing. In addition to risks of double taxation that can result from one-sided IRS adjustments to U.S. taxable income, companies that do not maintain transfer pricing documentation may be exposed to non-deductible penalties and interest. Penalties are 20 or 40 percent of the increase in tax. Taken over multiple years, this could cost unsuspecting companies millions of dollars of tax-related costs.
If you have any questions on how you should be preparing for this change, please contact WTP’s National Transfer Pricing and Valuation Services Practice leader, Guy Sanschagrin ator WTP’s National International Tax Services Practice leader Brian Schwam at