Large Business and International Division

In recent months, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) has issued a variety of international tax practice “units” as part of its process to improve tax compliance from identified groups of business taxpayers. The overall process also includes short descriptions of respective “campaigns” and briefly describes the agency’s designated, tailored treatment or treatments for each campaign.

Most recently, it issued a unit on the mutual agreement procedure (MAP), commonly referred to as the Competent Authority Process under bilateral tax treaties (Doc Control No. ISO/P/01_07_03-01). The purpose of the unit is to provide IRS examiners (for the most part, the unit does not address foreign-initiated adjustments) with clear guidance on their responsibility in situations where proposed adjustments will be made in a context in which the taxpayer could potentially face double taxation, consistent with the most recent revenue procedure (Rev. Proc.) 2015-40. The unit also provides a helpful checklist for taxpayers in such situations.

The unit amplifies the guidance in Rev. Proc. 2015-40 with respect to both issues arising in Advance Pricing and Mutual Agreement (APMA) and Treaty Assistance and Interpretation Team (TAIT) (for non-transfer pricing issues). The discussion is consistent with current practice. Critical issues addressed include the following. Continue Reading International Practice Units – Competent Authority

On June 20, 2017, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) hosted its final webinar regarding LB&I Campaigns. Our previous coverage of LB&I Campaigns can be found here. The webinar focused on two campaigns:  (1) Section 48C Energy Credits and (2) Land Developers – Completed Contract Method.

Continue Reading LB&I’s Final Campaigns Webinar: Section 48C Energy Credits and Completed Contract Method for Land Developers

On Tuesday, May 23, 2017, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) hosted its sixth in a series of eight webinars regarding LB&I Campaigns. Our previous coverage of LB&I Campaigns can be found here. The webinar focused on two cross-border activities campaigns: (1) the Repatriation Campaign and (2) the Form 1120-F Non-Filer Campaign. Below, we summarize LB&I’s comments on the new campaigns.

Repatriation Campaign

In general, the active earnings of foreign subsidiaries are not subject to tax until repatriated to the United States. Typically, those repatriations would be treated as dividends and would be subject to tax. LB&I stated that, through examination experience, it has observed that some taxpayers have engaged in techniques to permit repatriation from such entities while inappropriately avoiding US taxation.

LB&I developed the Repatriation Campaign with three goals in mind. First, LB&I was concerned with developing better objective techniques to identify risks across the broad taxpayer population. Second, LB&I is trying to improve sightlines into a broader segment of the LB&I population beyond the largest taxpayers under continuous audit. Third, LB&I intends to address any compliance risks related to repatriation in a way that increases voluntary compliance.

Unlike other campaigns, LB&I is not focused on a specific structure or techniques. LB&I is instead trying to identify objective indicators of opportunities to implement questionable planning (in the IRS’s view). Per LB&I, returns with those indicators are more likely to present compliance risks and are more likely to be selected. LB&I stated that it does not believe publicly identifying those indicators will increase voluntary compliance. Historically, when LB&I selected a return for examination, it did not necessarily start with any particular issue; any issue could be examined. If a return is selected under this campaign, LB&I’s initial focus will be narrower, but other compliance issues, if discovered, can still be added to the audit. Repatriation issues can also be raised outside of the Repatriation Campaign—possibly in a continuous audit or in an audit relating to another LB&I campaign. Continue Reading The View from Here: LB&I’s Cross-Border Activities Campaigns Webinar

On October 13, 2016, the Internal Revenue Service (IRS) released an LB&I International Practice Unit (IPU), available here, providing guidance to IRS agents relating to the identification of foreign goodwill or going concern value (FGWGC) for purposes of Internal Revenue Code (Code) Section 367. The IPU indicates that it was last updated on September 22, 2016.

The IPU focuses on the threshold question of whether, as a factual matter, FGWGC can exist in the first place in light of all the facts. As an example, the IPU states that because a business operation conducted outside the United States is a prerequisite for the existence of FGWGC, it is necessary to understand whether immediately before a transfer, the transferor of the property was engaged in a trade or business conducted outside the United States.

The IPU discusses the process of identifying foreign goodwill or going concern value, citing to authorities such as Newark Morning Ledger, TAM 200907024, the Bluebook and legislative history. It then discusses the steps that IRS agents should follow to identify FGWGC, with citations to various authorities as resources.

FGWGC is a hot topic right now. On September 14, 2015, the Department of the Treasury (Treasury) and the IRS issued proposed regulations that address the tax treatment under Code Sections 367(a) and (d) of certain transfers of property by United States persons to foreign corporations. As we have discussed here, the proposed regulations would change the law to tax all transfers to a foreign subsidiary of goodwill and going concern value for use in a trade or business outside the United States.  These proposed regulations raise serious questions regarding whether Treasury and the IRS exceeded their authority on this point.

As we noted in our initial post, the Internal Revenue Service (IRS) began publishing job aids and training materials developed by its International Practice Units (IPUs).  On April 6, 2016, the IRS released another IPU on section 482, available here.  The most recent IPU covers the three requirements under section 482: (1) two or more organizations, trades or business; (2) common ownership or control (direct or indirect) of the entities; and (3) the determination that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of the entities.

The most recent IPU takes a broad view of the application of section 482 and looks at the substance of transactions.  Regarding the first requirement, the IPU instructs examiners that organizations can include almost any type of entity and that a trade or business means a trade or business activity of any kind, regardless of place of organization, formal organization, type of ownership (individual or otherwise) and place of operation.  On the common control requirement, the IPU emphasizes that the form of control is not decisive and that the reality of control governs.  It also notes the presumption of control if income or deductions are arbitrarily shifted.  Finally, the reallocation to clearly reflect income requirement notes that an IRS allocation will be upheld unless the taxpayer can provide that the IRS determination was arbitrary and capricious.  Moreover, the IPU provides examples of circumstances that indicate the presence of arbitrary shifting of income, including when the net income of the foreign affiliate is high compared to the net income reported by the US company.  Of course, it may be appropriate for the foreign affiliate to have higher net income.

The IPU contains instructions on initial factual development of the requirements and provides references to resources that an agent should consult, including internal IRS resources, IRS guidance and case law.  It also identifies the types of documents that should be requested and reviewed during the examination.

As demonstrated by the large number of high-profile transfer pricing disputes currently pending in the courts, the IRS is taking a strong stance on the application of section 482.  Moreover, as demonstrated by this IPU, the IRS wants examining agents to be aggressive in identifying circumstances where there may be noncompliance with section 482.  Taxpayers with transfer pricing issues may benefit from reviewing all IPUs on section 482, both in documenting their transfer pricing activities and upon commencement of an examination to ensure that they have the documentation that the IRS will request.

As part of an overall strategy and reorganization to utilize resources more efficiently, the Internal Revenue Service’s (IRS’s) Large Business and International (LB&I) Division has developed a series of International Practice Units.  These Practice Units typically consist of a set of slides explaining how agents in the field should approach a particular issue of interest in international tax or transfer pricing. A complete list of these Practice Units can be found here.

The IRS intends the Practice Units to serve as “job aids and training materials” and as “a means for collaborating and sharing knowledge among IRS employees.” The first group was published at the end of 2014, and the IRS has steadily released new Practice Units ever since.  Presently, the IRS has published over 100 practice units on a wide range of international topics.

Practice Units provide general explanations of international tax concepts, as well as information about specific types of transactions.  Practice Units are not official pronouncements of law, and cannot be used, cited or relied upon for support.  Nonetheless, they provide taxpayers with a window into the IRS’s current thinking about these issues.  Moreover, Practice Units may be helpful to anticipate the IRS’s approach relating to specific international issues.  Over the next few months, Tax Controversy 360 will unveil a series of posts highlighting individual Practice Units of special interest—please stay tuned!

On January 20, 2016, the Large Business and International (LB&I) Division released a Practice Unit entitled Overview of Exchange Information Programs and Types of EOI Exchanges, defining and describing the Internal Revenue Service (IRS) Exchange of Information (EOI) programs. These EOI Practice Units specify what types of exchanges are covered by EOI programs and what types of information the IRS can seek through each type of EOI exchange.

The IRS breaks down the avenues for international information exchange into several categories:

  • Specific Requests involve requests for information pertaining to a specific taxpayer under examination or investigation for a specific period.
  • Spontaneous Exchanges involve the transmission of taxpayer information by one member of an EOI agreement that is deemed potentially of interest to a foreign partner even though no specific requests have been initiated by the foreign partner.
  • Automatic Exchanges involve the transmission of taxpayer information that foreign partners have agreed to exchange on a regular and systematic basis without individualized specific requests. The most common example includes information relating to dividends, interest, rents, royalties, salaries and annuities earned in one partner country by residents of the other partner country.
  • Industry-Wide Exchanges involve the sharing of trends, policies and operating practices in a particular industry or economic sector and do not implicate specific taxpayer information.
  • The Simultaneous Examination Program coordinates strategies and the development of technical issues between the United States and a foreign partner if it is determined a common interest exists between the respective taxing authorities. These discussions are intended to facilitate the exchange of relevant taxpayer information with the foreign partner in furtherance of the separate independent examinations of a taxpayer by each jurisdiction.
  • Joint Audits take place when the United States and one or more of its foreign partners collaborate to conduct a single examination of a taxpayer or a related taxpayer within their jurisdictions.
  • The Simultaneous Criminal Investigation Program operates through the EOI provisions of bilateral tax agreements and fosters the coordination of separate criminal investigations conducted concurrently by the United States and the foreign partner.
  • The Mutual Legal Assistance Program relates to an agreement that authorizes a partner country to secure evidence for use by the requesting country in criminal judicial proceedings of the taxpayer.
  • The Mutual Collection Assistance Request Program is intended to utilize the collection assistance provisions of tax treaties, enabling one partner state to collect taxes covered by the treaty on behalf of the other contracting state. These collection provisions appear in a limited number of current United States treaties.

The Practice Units provide a short general overview of each method and—of particular usefulness—describe what government office or department is responsible for executing requests in each category. Thus, the Practice Units may be a good “first line of defense” for information-gathering when you believe the IRS is pursuing or has received an international EOI request related to your client.

In future posts, we will discuss how these tools are utilized in practice, including how the IRS handles foreign-initiated Specific Requests.