Collateral consequences of U.S. transfer pricing adjustments.

• Position: Tax Executives Institute recommendations

March 18, 1999

On March 18, 1999, Tax Executives Institute submitted the following comments concerning the proposed revisions of Rev. Proc. 65-17, which relates to the collateral consequences of U.S. transfer pricing adjustments. The Institute's comments, submitted in the form of a letter from TEI President Lester D. Ezrati of Hewlett-Packard Company to IRS Associatel Chief Counsel (International) Michael Danilack, were prepared under the aegis of TEI's International Tax Committee, whose chair is Michael P. Boyle of Microsoft Corporation. G. Richard Eigenbrode of Applied Materials, Inc., a member of the Santa Clara Valley Chapter, contributed materially to the development of the Institute's comments.

On December 21, 1998, the Internal Revenue Service issued Announcement 99-1, which proposes to revise Revenue Procedure 65-17(1) relating to the collateral consequences of U.S. transfer pricing adjustments. The announcement was published in the January 11, 1999, issue of the Internal Revenue Bulletin (1999-2 I.R.B. 41). In January 1996 and July 1998, Tax Executives Institute filed comments on the proposed revision of Rev. Proc. 65-17. The Institute is pleased that many of its recommendations were incorporated in the announcement and offer the following comments on the formal proposal to revise the revenue procedure.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our more than 5,000 members represent 2,800 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises and to transfer pricing issues in particular. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the proposed revision of Rev. Proc. 65-17.

Rev. Proc. 65-17 addresses the collateral consequences of U.S. transfer pricing adjustments. Specifically, the procedure permits a qualifying U.S. taxpayer, whose taxable income has been increased by reason of an allocation under section 482 of the Internal Revenue Code, to receive payment from the related entity from (or to) which the allocation of income (or deduction) was made, without having the receipt of such payment considered a taxable distribution (or contribution) for federal income tax purposes.

The procedure essentially adopts the theory that section 482 adjustments will be treated as a loan -- from the entity to which the income properly belonged -- to the entity that received the income. This treatment occurs whether the adjustment increases or decreases the taxpayer's reported U.S. taxable income. Moreover, taxpayers may...