Transfer pricing controversy update on IRS audit trends, IRS appeals, APMA Program, and foreign APAs

Transcription

1 Transfer pricing controversy update on IRS audit trends, IRS appeals, APMA Program, and foreign APAs

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2 Annual Transfer Pricing Conference New York 16 March 2015

3 Today s presenters Craig Sharon Ernst & Young LLP Washington, DC Frank Ng Ernst & Young LLP Washington, DC Michael Halloran Ernst & Young LLP New York, NY Steve Sideris Ernst & Young LLP Boston, MA Page 3 Annual Transfer Pricing Conference New York 16 March 2015

4 Agenda Transfer pricing (TP) controversy on the rise Internal Revenue Service (IRS) trends and focus areas IRS Appeals judicial approach and culture Update on the Advance Pricing and Mutual Agreement (APMA) Program Page 4 Annual Transfer Pricing Conference New York 16 March 2015

5 TP controversy on the rise Page 5 Annual Transfer Pricing Conference New York 16 March 2015

6 EY 2014 taxpayer survey Methodology and survey base 830 tax and finance executives representing more than 20 industries in 25 jurisdictions Four key areas of tax risk identified: 1 Reputation risk 2 Base Erosion and Profit Shifting (BEPS) and legislation risk 3 Enforcement risk 4 Operational risk Page 6 Annual Transfer Pricing Conference New York 16 March 2015

7 EY 2014 tax authority survey Key themes and findings since the last EY survey in 2012: There has been an increase in tax authority transfer pricing resources. Industries that are attracting particular attention include pharmaceuticals, automotive and financial services, particularly in Europe. Tax authorities report focusing more on business restructurings, financing transactions and location savings. Tax authorities also continue to increase their use of profitand risk-based assessments and push for local-country comparables. Page 7 Annual Transfer Pricing Conference New York 16 March 2015

8 EY 2014 tax authority survey Typical transfer pricing penalties are more stringent, but can be reduced if taxpayers maintain robust local transfer pricing documentation. Formal Advance Pricing Agreement (APA) Programs are more broadly available. The Mutual Agreement Procedure (MAP) Program is used widely in some jurisdictions, but its effectiveness is limited, particularly in emerging countries. There is still little or no integration between transfer pricing and customs valuation. Page 8 Annual Transfer Pricing Conference New York 16 March 2015

9 IRS trends and focus areas Page 9 Annual Transfer Pricing Conference New York 16 March 2015

10 Current IRS approach to TP enforcement 2010 Large Business and International division (LB&I) restructuring created single integrated approach to IRS TP enforcement International Business Compliance (IBC) plus Office of Transfer Pricing Operations (TPO) IBC = exam function (international examiners and economists) TPO = Transfer Pricing Practice (TPP), International Practice Networks (IPNs) and APMA program Supplements IBC activities Rules of engagement still a work in progress Emerging resource challenges Page 10 Annual Transfer Pricing Conference New York 16 March 2015

11 Structural changes within LB&I LB&I Commissioner Heather C. Maloy Deputy commissioner (domestic) Deputy commissioner (international) Shared support Pre-filing and technical guidance Sergio Arellano (A) Doug O Donnell Susan Latham, Dir. Tina Meaux, Dir. (A) Communications, technology and media Cheryl Claybough, Dir. Kimberly Edwards, DFO NW (A) Rosemary Daley, DFO SW Assistant deputy commissioner, international John Hinding (A) Business systems planning Dean Wilkerson, Dir. Deputy director Deborah Palacheck (A) Financial services Rosemary Sereti, Dir. Jo McGready, DFO Fin Prod Barbara Harris, DFO NY International business compliance Sharon Porter, Dir. (A) Orrin Byrd, DFO W (A) Jolanta Sanders, DFO E William Holmes, Dir. IDM Management and finance Keith Walker, Dir. Global high wealth Cheryl Claybough, Dir. (A) International Individual compliance David Horton, Dir. Pam Drenthe, DFO Planning, analysis, inventory and research Christopher Larsen, Dir. (A) Heavy manufacturing and pharmaceutical Rosemary Sereti, Dir. (A) Catherine Jones, DFO NE Lavena Williams, DFO SE Transfer pricing operations Dave Varley, Director, TPO (A) Hareesh Dhawale, Dir., APMA Equity, diversity and inclusion Rona Evans, Dir. Natural resources and construction Kathy Robbins, Dir. Katheryn Houston, DFO W Dennis Figg, DFO E (A) Steve Whitaker, DFO Eng (A) Foreign payments practice Theodore Setzer, Dir. Division planning, oversight reporting and liaison Michael Boccarossa (A) Retailers, food, transportation and health care Lori Nichols, Dir. (A) Margaret Von Lienen, DFO E (A) Lori Caskey, DFO W Paul Curtis, DFO CAS (A) = Acting Page 11 Annual Transfer Pricing Conference New York 16 March 2015

12 Operational changes within LB&I Three core strategies: Better case selection, development and presentation Take back the audit process Focus more on issues, less on taxpayers IPNs TPP audit road map Information Document Request (IDR) directives Revise technical rules to support rational economic outcomes Section 367(d) regulatory project Organisation for Economic Co-operation and Development (OECD) projects (e.g., Chapter 6 revisions, BEPS project) US international tax reform Win in litigation to rebalance perceived hazards Page 12 Annual Transfer Pricing Conference New York 16 March 2015

13 LB&I Coordinated Industry Cases (CICs) pilot IRS LB&I initiated a new CIC pilot on 30 April The pilot will run for 18 months. Currently, CIC cases are: Front-end loaded into the compliance plan Limited in flexibility to allocate resources to other compliance activities Under the new process, all CIC cases would: Undergo a consistent classification process to determine return compliance risk and to identify issues Be entered into the workload delivery system New classification process will include: Issue identification and written explanations on compliance risks, and documentation to support compliance risk conclusions All information will be included in case file for use in examination. Page 13 Annual Transfer Pricing Conference New York 16 March 2015

14 TP audit road map and new rules of engagement TP audit road map (Feb. 2014): provides best practices and reference materials for LB&I employees with respect to the administration of TP audits Organized around a basic 24-month (aspirational) audit timeline; three phases: a. planning, b. execution, c. resolution Emphasis is placed on coordination within LB&I throughout the process, including the exam team, IRS transfer pricing specialists and the taxpayer, and encourages constant communication among all three groups of stakeholders Rules of engagement (August 2014): general guidelines for TPP and IBC examiners Neither group has control over the issues. In case of disagreements, issues will be elevated to the next level of management and decided. This new document should be understood as a complement to the TP audit road map. Page 14 Annual Transfer Pricing Conference New York 16 March 2015

15 Transfer pricing audit road map Quality examination process (QEP) QEP phases Planning Transfer pricing audit stages and timeline Cycle time in months Execution Resolution Non-cycle time 1 st to 2 nd 3 rd 4 th 5 th 6 th 7 th to 15 th 16 th 17 th 18 th 19 th 20 th to 23 rd 24 th Pre-examination analysis Opening conference, transfer pricing orientation Preparation of initial risk analysis, exam plan and key milestones Fact finding and additional IDRs, functional analysis Mid-cycle risk assessment Issue development and preliminary reports Pre-Notice of Proposed Adjustment (NOPA) issue presentation Resolution discussions Final NOPA and case closing Page 15 Annual Transfer Pricing Conference New York 16 March 2015

16 LB&I Directives on information document requests (IDRs) issued 28/2/14 Reiterates requirement that all IDRs must be: Issue-focused (i.e., identify and state the issue that has led the examiner or specialist to request the information included in the IDR) Discussed with taxpayer prior to issuance, both in regard to content and determining a reasonable response time frame Outlines mandatory three-step IDR enforcement process: Delinquency notice Pre-summons letter Summons Effective date 3/3/2014 Page 16 Annual Transfer Pricing Conference New York 16 March 2015

17 New IDR enforcement process timeline Within 10 business days No more than 10 business days No more than 10 business days 10 business days No timeline specified but likely quickly IDR deadline Delinquency notice Response date delinquency notice Presummons letter Presummons letter response date Summons Under the new directive, the IDR process from the date of the initial draft IDR to the initiation of the summons process can take approximately 140 days Page 17 Annual Transfer Pricing Conference New York 16 March 2015

18 IRS International Practice Networks (IPNs) Integrated International Program International matrix is a framework for international strategy, training, networks and data management. It organizes all international issues into four areas: business outbound, business inbound, individual outbound and individual inbound. Four cross-over issues include foreign currency, information gathering, corporate organizations/transactions and treaties. IPNs aligned with the matrix strategy Most international matrix issue areas represented by an IPN IPNs led by Steering Committee technical specialist staff, an international manager sponsor, LB&I, Small Business/Self-Employed (SB/SE) and Associate Chief Counsel International (ACCI) attorneys IPNs intended to allow international personnel organization-wide, and counsel to share and collaborate on strategic international issues First 46 units published in Dec many deal with TP; standard format; very basic Page 18 Annual Transfer Pricing Conference New York 16 March 2015

19 IPNs matrix strategy Income shifting Inbound financing Repatriation/ withholding International business compliance (IBC) inbound Income shifting Jurisdiction to tax Deferral planning US activities Foreign tax credit (FTC) management Repatriation International business compliance (IBC) outbound US investments International individual compliance (IIC) inbound IPNs will focus on international issues and will replace the tiered-issue process. IPN will report to LB&I Deputy Commissioner (International). Jurisdiction to tax Offshore arrangements FTCs Pass-thru entities Foreign corporations International individual compliance (IIC) outbound Page 19 Annual Transfer Pricing Conference New York 16 March 2015

20 Goals for the IPNs Tap into technical knowledge: Facilitate the knowledge management model to broaden technical proficiency and increase technical advice output Coordinate and support identification and publication of guidance Expand collaboration: Facilitate and engage additional resources to identify proficiency throughout LB&I and the IRS to augment the development of technical positions Realize that IPNs do not command or control issues Improve quality and institution building: Sharing institutional knowledge and best practices to improve quality across the organization Providing concurrent opportunities to teach and learn Improve line of sight: LB&I is emphasizing line of sight into technical positions and consistent application of issue guidance across the organization. Page 20 Annual Transfer Pricing Conference New York 16 March 2015

21 IRS Appeals Judicial Approach and Culture (AJAC) Page 21 Annual Transfer Pricing Conference New York 16 March 2015

22 AJAC project The AJAC Project returns Appeals to a quasi-judicial approach to case management with the goal of enhancing internal and external customer perception of a fair, impartial and independent Office of Appeals. AJAC guidance was issued in two phases and applies to examination, collection and penalty cases handled by Appeals. AJAC guidance generally applies to non-docketed cases; similar procedures for docketed cases are forthcoming. The project provides guidance on pre-conference meetings and ongoing communications with LB&I. Page 22 Annual Transfer Pricing Conference New York 16 March 2015

23 AJAC Phase 1 interim guidance on examination AP effective 18 July 2013 Revised Policy Statement 8-2 (formerly P-8-49) Appeals will not raise new issues or reopen issues agreed to by taxpayer and Compliance. Appeals will attempt to settle a case on factual hazards when cases submitted by Compliance are not fully developed and taxpayer presents no new information. Clarifies that Appeals officers are not examiners and should not participate in assisting Compliance with case development. Page 23 Annual Transfer Pricing Conference New York 16 March 2015

24 AJAC Phase 2 implementation AP effective for all new Appeals cases received on or after 2 September 2014 Effective 1 October 2014 for assistance between Appeals and Counsel on docketed cases At least 365 days remaining on statute of limitations; at least 180 days for cases returned to originating function for consideration of new information or issue If taxpayer provides new information or new evidence, at least 210 days remaining on the statute of limitations when case will be received by originating (exam) function Page 24 Annual Transfer Pricing Conference New York 16 March 2015

25 AJAC Phase 2 implementation Case returned to examination for further development of new information, taxpayer raises new issue(s), failure to secure timely consent or pending technical advice. If Appeals Officer determines taxpayer or practitioner unreasonably delays the process by intentionally submitting new information or raising new issues multiple times, the Appeals Officer can, with approval, make a determination based on factual hazard without consideration of new information or issue. Specific procedures for returning a case to LB&I: Generally, return case to LB&I or allow opportunity to review and comment on information within at least 45 days Page 25 Annual Transfer Pricing Conference New York 16 March 2015

26 Update on the APMA Program Page 26 Annual Transfer Pricing Conference New York 16 March 2015

27 Advance Pricing Agreements (APAs) APA results through 2013 APA results for 2014? Completions Number Countries Submissions Number Countries Page 27 Annual Transfer Pricing Conference New York 16 March 2015

28 APAs Applications filed Page 28 Annual Transfer Pricing Conference New York 16 March 2015

29 APAs Bilateral APAs filed by country % 5% 51% Japan Canada Korea All other countries 22% Page 29 Annual Transfer Pricing Conference New York 16 March 2015

30 APAs APAs executed Page 30 Annual Transfer Pricing Conference New York 16 March 2015

31 APAs Bilateral APAs executed by country % 5% 15% 19% 53% Japan Canada All other countries UK Australia Page 31 Annual Transfer Pricing Conference New York 16 March 2015

32 APAs Pending APAs Page 32 Annual Transfer Pricing Conference New York 16 March 2015

33 APAs Bilateral APAs pending by country % 5% 8% 41% Japan Canada Korea Germany All other countries 22% Page 33 Annual Transfer Pricing Conference New York 16 March 2015

34 APAs Staffing Team leaders and economists 70 in early in March currently Hiring freeze? Normal attrition Expected increase in MAP cases due to BEPS Challenging environment Work harder? Work smarter? Limit APAs? Page 34 Annual Transfer Pricing Conference New York 16 March 2015

35 APAs APMA goal for APAs Protect the fisc? Practical settlements in a reasonable time Assist taxpayers in avoiding double tax Ideal APA candidate What does APMA look for? Update on India Framework agreement reached for MAP cases Expectations for APAs now that dam has broken? Update on IRS Notices (MAP) and (APA) Page 35 Annual Transfer Pricing Conference New York 16 March 2015

36 Challenges with respect to MAP globally Increasing situations that fall outside traditional scope of double taxation but rather into taxation not in accordance with the convention Three (or more) country fact patterns Secondary adjustments Self-initiated and year-end adjustments Still, in general, a slow resolution process Competent authorities (CAs) without authority to resolve matters Shortage of resources Arbitration clauses still not widespread Hesitancy to submit cases to arbitration where it is an option OECD discussion draft on Action Item 14 ( making MAP more effective ) Page 36 Annual Transfer Pricing Conference New York 16 March 2015

37 Questions? Page 37 Annual Transfer Pricing Conference New York 16 March 2015

38 Contacts Craig Sharon Ernst & Young LLP Washington, DC Michael Halloran Ernst & Young LLP New York, NY Frank Ng Ernst & Young LLP Washington, DC Steve Sideris Ernst & Young LLP Boston, MA Page 38 Annual Transfer Pricing Conference New York 16 March 2015