Anatomy of a Multijurisdictional Dispute: Recent tax reform presents additional considerations.

AuthorWilliamson, Joel

Demands on tax executives have never been higher. Whereas international tax rules have always been complex, the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting (BEPS) Action Plan and now US. tax reform introduce new levels of complexity and uncertainty. At the same time, sensational media coverage of tax disputes is on the rise, threatening multinationals' reputations and ultimately their bottom line. It is thus critical for multinationals to be prepared to manage global tax disputes effectively. The following example illustrates various considerations for a multijurisdictional tax controversy.

Preparing for Multijurisdictional Audits

A U.S.-based multinational company operates through wholly owned subsidiaries across the globe. The U.S. parent (USP) has developed certain technology and trademarks that it is considering licensing to its subsidiaries in Country A and Country B (SubA and SubB, respectively). In addition, USP is considering charging its subsidiaries a management fee for certain services USP provides to the worldwide group. In light of these facts, USP commissions a transfer pricing study to assess the potential royalty and management fee.

When planning a multijurisdictional transaction, taxpayers like USP should at the same time prepare for an audit from any involved jurisdiction. For example, it is important to thoroughly document the planning process--including all interviews, analyses, research, and reports. Failing to do so could place the company in a difficult position during an examination, because key individuals may be unavailable and records may no longer exist. Moreover, when information is gathered from employees, it is critical to distinguish between the legal structure and the business structure of the organization. Failing to appreciate the differences could easily result in a flawed analysis, creating significant problems down the road.

Indeed, there are a number of ways that USP can be proactive when planning its transactions, including by: (i) identifying key employees across the organization that could be helpful for interviews, site tours, and responding to IDRs; (ii) anticipating common questions and organizing responsive documentation that can be provided consistently across jurisdictions without jeopardizing privilege protections, (1) privacy laws, or trade secrets; and (iii) preparing an outline of legal issues and arguments that can be shared within the tax department to ensure a consistent international position. To be sure, it is critical to maintain a consistent narrative across jurisdictions now that governments worldwide have implemented the BEPS Action 13 documentation and information-sharing proposals, particularly country-by-country reporting of taxpayer information.

Coordinating Multijurisdictional Audits

Now let's assume that USP's transfer pricing study concludes that: (i) USP should be entitled to a five percent combined royalty for licensing its technology and trademarks, and (ii) USP should be compensated for its management services at cost plus a markup. Accordingly, USP and its subsidiaries implement the intercompany charges and report the results on their respective tax returns.

Several years later the IRS audits the management fee and the royalty charge. The exam team believes that USP provides its subsidiaries with valuable intellectual property and management services that should be evaluated on an aggregated basis, and that the foreign subsidiaries should be treated as routine service providers for USP that are entitled only to a...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT