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Frank Vari, JD. MTax, CPA

How About VAT!? – Practical VAT Issues for U.S. Based Exporters

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Frank J. Vari, JD, MTax, CPA

One of the most common issues in our international tax practice today is Value Added Tax (VAT).  Even with all of the questions around U.S. sales tax in the wake of South Dakota v. Wayfair, at least our U.S. based clients understand the basic U.S. sales tax rules.  That’s not always the case with VAT.  U.S. based exporters, ranging from software developers to manufacturers, are subject to a VAT.  Even those that fully understand compliance don’t often understand how simply complying and not being proactive around the VAT is costing them money and margin.

The most common issue we face with respect to VAT is the U.S. exporter incurring an unexpected VAT liability.  It happens a lot and it happens because many smaller U.S. exporters don’t understand, or choose to ignore, foreign VAT rules.  When it happens, and the U.S. exporter is charged with a VAT, profits can be reduced or eliminated, and the U.S. exporter can be taken out of the market by having to increase their selling price, or reduce their margins on export sales, due to unrecoverable VAT.

A basic understanding of the VAT is in order here.  The VAT is an indirect tax levied on the consumption or use of goods and services.  It is charged at each step of the supply chain process.  The product’s end consumer bears the costs of VAT while registered businesses collect and account for VAT acting as tax collectors on behalf of the government.

Here’s a basic example of how VAT works within a Euro country with a VAT regime where all of the supply chain members are properly VAT registered and compliant:

A widget manufacturer sells to a wholesaler for €100.  Under the VAT, the manufacturer collects a VAT of 5%, or €5, from the wholesaler on behalf of the government.  The wholesaler pays the manufacturer a total of €105.

The wholesaler increases the selling price to €200 and sells it to a retailer. The wholesaler collects a VAT of 5%, or €10, from the retailer on behalf of the government whilst receiving a refund of the VAT paid to the manufacturer in the previous step.  The retailer pays the wholesaler a total of €210.

The retailer further increases the selling price to €300 and sells it to a consumer.  The retailer collects a VAT of 5%, or €15, from the consumer whilst receiving a refund of the VAT paid to the wholesaler in the previous step.  The consumer pays the retailer a total amount of €315 and receives no refund of any VAT paid.  Thus, the consumer bears the cost of all VAT incurred throughout the supply chain as all others have recovered what they paid.

That example is rather basic but, in practice, it can be very complex when the supply chain crosses multiple borders and VAT regimes, rates, and classifications.  Product transformation through the supply chain raises additional issues.  That said, it is imperative that U.S. exporters fully understand the VAT rules and their VAT responsibilities.  I’ve seen too many U.S. exporters end up with unexpected VAT costs and penalties that eliminate any profits on their foreign sales especially when legal fees are added to the equation.

The most commonly raised question is how do you basically comply with the VAT?  In some cases, e.g. the sale of physical goods, the law is rather settled.  In the case of other emerging types of business, e.g., online software sales, the law is evolving and is based on each jurisdiction’s rules.  With the exception of the European Union (EU), there really is no Uniform Commercial Code (UCC) or uniform rules on this type of activity.  That makes it tough to provide general answers that a client can rely on.  Only with specific facts can one arrive at specific answers.

As outlined in the example above, the global theme is that the seller is the one who bears the responsibility for paying the VAT.  In practice that works in many different ways, depending on the rules of the specific jurisdiction.  For a U.S. exporter, some of the most important practices and issues are:

  • For physical goods, the importer of record usually incurs the VAT.  If the U.S. exporter can get the foreign buyer to be the importer of record they can usually pass on VAT issues altogether.
  • If the foreign buyer is a VAT registered business, they may be responsible for collecting any VAT and remitting it if they know the seller is offshore or not VAT registered.  This “reverse charge” mechanism is a rule in the EU and various other jurisdictions as well.  In many instances, the U.S. seller need not worry about VAT if they are aware that the foreign customer is VAT registered and they have the foreign customer’s VAT number on file.  That’s great from a compliance perspective but the U.S. seller still ends up economically bearing the VAT expense that the buyer is just passing along on their behalf.  Also keep in mind that most individuals don’t have a VAT registration.
  • In the EU, there is a common reporting system where a non-EU company can register in one EU country, e.g., Ireland, and then run all of their EU sales through that single registration.  That has merit solely for sales to EU customers where there is common reporting system.
  • If the seller has a number of clients in one country with “VATable” sales, the seller should strongly consider registering there to properly collect and remit VAT.  Many clients do this in places where they have sales and where VAT problems can bring serious criminal charges.  They may even set up a shell company (rare) for this purpose because if there is no company than the VAT cannot be used or credited in the future by the seller due to lack of a VAT registration.  Otherwise, the unrecoverable VAT paid simply becomes a sunk cost.
  • A U.S. exporter may try using an intermediary.  For example, the U.S. exporter can sell directly to an EU VAT registered intermediary who, in turn, sells to non-EU countries.  In this case, the intermediary is the one who bears the burden for the VAT compliance in non-EU countries.  Many small U.S. exporters seek out independent foreign distributors for this reason.
  • Keep in mind that VAT classification is very important as different countries apply VAT at different rates to different products.  For example, software for medical imaging or educational purposes may be rated differently than software for gaming.  This is very similar to customs classifications.  Freight forwarders often fail their clients here.  A freight forwarder will make sure the VAT is paid but it is not their job, and nor do they feel it is their job, to make sure the VAT is paid at the lowest available rate.  We see that a lot.
  • Customs & Duties is always an issue as well even though it is out of this article’s scope.  You always want to make sure that all foreign exports comply with local customs & duty rules and regulations.  Even for online sales, some countries do levy import duties on, for example, imported software licenses.

These practices and issues are the ones we see most often but they are certainly not an exhaustive list or all possible outcomes.  The real problem is the lack of global or regional uniformity as well as the ever evolving nature of the rules.  When you couple the obvious complexities with aggressive enforcement, especially against non-resident importers, you see that it doesn’t take much for real problems to arise even for very small U.S. exporters.

VAT violations can be very nasty.  Goods and inventory can be seized, a company be barred from a market and, in some countries, officers, directors, or employees can face criminal penalties including prison.  I’ve been a part of criminal VAT cases and it is not for the faint of heart.

The bottom line is that the cost of upfront VAT compliance is much cheaper than defending a nasty VAT audit or trying to free impounded inventory.  Don’t let VAT drag your profits down or be a barrier to profitable export sales.  Contact us today to help you with your VAT and international tax questions and issues.

 

Frank J. Vari, JD, MTax, CPA is the practice leader of FJV Tax which is a CPA firm specializing in complex international and U.S. tax planning.  FJV Tax has offices in Wellesley and Boston.  The author can be reached via email at frank.vari@fjvtax.com or telephone at 617-770-7286/800-685-2324.  You can learn more about FJV Tax at fjvtax.com.

 

 

Maximizing IC-DISC Benefits After Tax Reform

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Frank J. Vari, JD, MTax, CPA

Those that have followed the journey of the Interest Charge Domestic International Sales Corporation (IC-DISC) through the winding legislative process behind the Tax Cuts and Jobs Act of 2017 (TCJA) know by now that it has survived intact.  Those that have followed these export tax benefits from the 1970’s DISC, whose enactment was somewhat contemporaneous with the unrelated peak of disco music, to FSC to EIE and now back to IC-DISC know that it has really been quite a legislative and judicial journey for these important export tax benefits.  Now that we can be sure that IC-DISC benefits have survived, where exactly do we stand post-tax reform and what can we do to maximize IC-DISC benefits?

IC-DISC one of the last remaining export incentives provided to U.S. based taxpayers.  It’s been an important part of tax planning for closely held companies since the Jobs and Growth Tax Relief Reconciliation Act of 2003 cemented into law reduced capital gains tax rates making IC-DISC a profitable tax strategy.  As an added bonus, it is not currently on the World Trade Organization’s radar unlike some other current U.S tax incentives, i.e., the Foreign Derived Intangible Income (FDII) regime, so IC-DISC beneficiaries can rest assured that they are playing nice with our trade partners which is comforting.  Also, don’t forget that IC-DISC is probably the last remaining tax planning technique where the IRS is willing to look past substance over form, at least a little bit – more on that later, which is not something seen too often.

Everyone probably knows the bad news by now that the reduction in U.S. individual tax rates has also reduced the IC-DISC benefits.  To corporate shareholders, it still provides a hefty 13.2% tax rate benefit to individuals which is only a slight reduction from the pre-TCJA rate of 15.8%.  The difference is the 2.6% top individual tax rate drop from 39.6% to 37%.  If the business is a pass-through, and assuming newly enacted §199A is available to the taxpayer, it still provides a 6% rate benefit.  Thus, even post TCJA, IC-DISC remains an important planning tool for businesses of all types.

What many taxpayers are missing is that there are planning tools out there that can make IC-DISC an even better tax planning vehicle without increasing shareholder risk.  Some are more complex than others but here are some that we’re using with our IC-DISC clients:

Ensuring IC-DISC Compliance

If an IC-DISC is not properly qualified there are no benefits and there are likely penalties.  This is pretty simple to understand but it is very often a problem.  IC-DISC is an attractive planning tool but it is often adopted by taxpayers who don’t want to deal with the complexities of IC-DISC qualification or by an inexperienced practitioner who fails to properly implement or advise their client on the importance of these rules.  I have been part of many acquisitions of middle market companies where the seller’s IC-DISC was determined to be defective during due diligence as a result of taxpayer error.  Similarly, the IRS understands this very well and disqualifies many IC-DISC benefits on this basis.  It is never good when an IC-DISC fails this way but in practice many do.  Please don’t be the advisor that has to tell your client their IC-DISC has been disqualified.

Utilize IRC §482 Transfer Pricing

IC-DISC is one of the few areas where the IRS cannot force a taxpayer to use IRC §482 arm’s length principles to determine the profit allocation between related parties.  However, IRC §482 is best used here proactively by the taxpayer.  Most IC-DISC taxpayers that I work with use the 4% of export gross receipts methodology.  For many taxpayers that’s a mistake.  Most often, their IC-DISC advisor doesn’t fully understand how IRC §482 works and is unable to even model what the answer would be so the taxpayer doesn’t get to see what the options truly are.  By addressing the IRC §482 options, or consulting with an IRC §482 expert, an IC-DISC may see greatly enhanced profits.  It is certainly fact dependent, but I’ve seen it deliver enough benefits that is part of every IC-DISC analysis we perform.

Grouping Transactions vs. Transaction by Transaction (TxT)

For those of us that practiced in the FSC days, TxT was one of the most popular tax planning tools out there and was used by FSCs with literally millions of individual transactions.  We all know that FSC is long gone but the TxT method is alive and well but is a little of a lost art since the very large companies had to stop doing it.  Most of the IC-DISCs out there utilize grouping(s) of transactions.  Grouping is a proper methodology and it can be the best and is certainly the easiest to apply.  However, like transfer pricing above, TxT often produces significantly better benefits.  It requires that each individual transaction be treated separately which is beyond the capabilities of many IC-DISC practitioners.  At a minimum, grouping vs. TxT must be modeled to ensure that the taxpayer is obtaining, or maintaining, maximum benefits.

Appropriate Expense Allocations

In order to properly determine the profitability of foreign sales, the taxpayer must utilize the principles of IRC Treas. Reg. §1.861-8 and its relations.  These rules can certainly be complex and they are not often applied properly.  For example, many U.S. based exporters spend large amounts on things like interest and selling expenses which are, in practice, mostly directed toward U.S. activities.  By improperly overallocating these expenses to foreign sales they are artificially dampening IC-DISC profits.  The IRC §861 expense allocation rules are not optional and it is imperative that the practitioner fully understand them.

IC-DISC for the Foreign Owned U.S. Company

There are many closely held U.S. companies with foreign shareholders that export.  Please keep in mind here that sales to Canada and Mexico are also exports.  Many of these corporations do not utilize IC-DISC but many should.  Especially those that reside in treaty countries with low dividend tax withholding rates.  This can be difficult because to properly model the results you need to understand the shareholder’s resident country tax laws as well as the shareholder’s tax posture.  That said, I’ve seen this benefit work for foreign shareholders often enough that I always consider it when I see these facts.

Utilizing a Roth IRA

This has been a somewhat popular planning tool utilizing a Roth IRA to avoid annual contribution limits.  The Roth IRA value grows while the IC-DISC profits are not taxed.  Simple enough but it is not a risk free strategy.  The IRS feels that this is a violation of substance over form and argued that, albeit unsuccessfully, in Summa Holdings, Inc., No. 16-1712 (6th Cir. 2/16/17).  My view is that the IRS argued this case wrong but that’s another article.  If you live in the 6th Circuit, good for you.  The primary risks here are that the IRS does not like this and Summa Holdings predated the enactment of IRS §7701(o) which codified the economic substance doctrine.  Until the IRS makes another run at this you certainly have substantial authority for this position where it makes sense.

IC-DISC as Non-Qualified Executive Retirement Tool

You don’t see this one too often but it makes sense.  I advised with a practitioner whose client was retiring along with a sibling from a leadership position in a successful family business.  IC-DISC itself made sense as a planning tool but it also played a neat part in the transition of the business by placing the IC-DISC ownership in the hands of the retiring executives.  Keep in mind that the IC-DISC does not have to be held by the same shareholders as the related supplier.  This planning, in essence, permits the related supplier a full tax deduction and the retired executives enjoy reduced qualified dividend tax rates.

Summary

The bottom line here is that IC-DISC remains alive and well for the foreseeable future courtesy of the TCJA.  Thus, it is time to start considering using IC-DISC again and, more importantly, maximizing IC-DISC benefits with proven and reliable strategies.  We help our IC-DISC clients on these and other tax planning issues.  Let us help you or your clients.

To learn more about FJV’s IC-DISC or transfer pricing practices and our considerable experience with this important topic and how it impacts your business and tax positions, please contact FJV Tax or visit us at fjvtax.com.

Foreign Asset Tax Compliance and Why It Is Important Right Now

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Frank J. Vari, JD, MTax, CPA

International tax can be a very complex subject but most associate both the topic and the complexity with multinational businesses.  That may be true, but the greatest risk if often borne by individuals who do not properly understand their U.S. reporting obligations for foreign income, assets, and investments.  With the U.S. Internal Revenue Service (IRS) recently declaring that the IRS Offshore Voluntary Disclosure Program (OVDP), which was started in 2009, will close for good on September 28, 2018, taxpayers with unreported foreign assets should immediately determine if ODVP would benefit them before it is gone for good.  At this same time, the IRS has noted that their enhanced enforcement efforts against unreported foreign assets will not end.  Thus, the time is now for taxpayers with unreported foreign assets to formulate a plan for compliance or risk what have been, in certain cases, draconian penalties.

Many individual taxpayers, including those from outside the U.S. who are not educated in U.S. tax reporting rules, own assets located in different countries.  Some of these assets are as benign as a bank account they hold with an elderly relative to those with a Swiss bank account fully intended for shelter from the U.S. tax and legal system.  In practice, most all of these cases lean toward the former, however, they all are covered by pretty much the same rules.

This article is intended to provide a quick overview of the issue and the avenues available to taxpayers to maintain or obtain compliance with the rules.

Reporting Basics

It is probably not news to any practitioner that a U.S. taxpayer has to report all of their income on a global basis.  It is also probably not news that many individual clients do not fully disclose, or fully understand the law to disclose, each and every non-U.S. income stream.  That, at a minimum, must be done even if it takes some digging to gather all of the appropriate information.

Reporting assets located outside the U.S. is a bit more tricky.  Not only from an asset identification perspective but from a where and how to report perspective.  For example, a U.S. taxpayer may have a small longtime family home somewhere in Europe that they occasionally rent to friends.  It’s simple enough to understand that the income must be reported on Schedule E, but what about the real estate itself?  More on that later but you see the issue.

Foreign Bank Account Reporting (FBAR)

U.S. residents or citizens must report a financial interest in, or signature or other authority over, specified bank and other accounts in a foreign country on Financial Crimes Enforcement Network (FinCEN) Form 114 (the successor to the beloved Form TD 90-22.1), i.e., FBAR, if the accounts aggregate maximum values exceed $10,000 at any time during a calendar year.  Please note the “aggregate” and “at any time” language.

FBAR requirements apply to individuals, corporations, partnerships, trusts, estates, and LLCs as well as entities disregarded for tax purposes.  The regulations under Sec. 6038D require that a specified person look through a disregarded entity for reporting foreign assets on Form 8938 (discussed below).  However, the FBAR requirements impose a separate, independent reporting obligation on such entities.

There are plenty of traps for the unwary here.  The most simple may be a U.S. taxpayer who has signatory authority to co-sign with an elderly relative located outside the U.S.  More difficult to identify is the reporting obligation of a U.S. corporate executive who has signatory authority, likely along with many others, over a long dormant overseas corporate bank account or accounts exceeding $10,000 at some point during a calendar year.  It is a very common situation that is difficult to identify and, hence, ensure compliance.  Add fiscal years and foreign currency translation to the equation and you see where the simple becomes difficult even for sophisticated taxpayers.

Form 8938

Specified U.S. individuals with foreign financial assets may need to file Form 8938, also known as the Statement of Specified Foreign Financial Assets as part of their annual income tax return. A “specified individual” is a U.S. citizen, a resident alien of the U.S., or anon-resident alien filing a joint U.S. income tax return.

The “financial assets” which must be reported includes foreign bank accounts, assets held for investment by a foreign institution, foreign retirement plans, and jointly owned foreign financial assets.  It is not uncommon for a business executive who has moved to the U.S. to have an interest in a foreign pension plan from a former employer.  Items like this must be considered.

The Form 8938 reporting thresholds range from $50,000 of foreign financial assets on the last day of the year or $75,000 at any time during the year for unmarried U.S. individuals to $400,000 on the last day of the year and $600,000 at any time during the year for married joint filers living abroad.  Be sure to reference the detailed Form 8938 reporting requirements once the assets themselves are identified.

Besides the individual nature of Form 8938, it is important to note one critical difference between Form 8938 reporting and FBAR. Form 8938 does not require reporting of financial accounts held in foreign branches or held in foreign affiliates of a U.S.-based financial institution.  However, such accounts are considered financial accounts for purposes of FBAR reporting because they are located in a foreign country.

Other Common Reporting Forms

The FBAR and Form 8938 are the most widely used foreign asset reporting forms but not the only ones.  There are a number of others that capture different kinds of foreign asset activity.  These are:

  • Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, for reporting transfers of property to foreign corporations;
  • Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;
  • Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, for reporting affiliations with foreign trusts or the receipt of gifts from non-U.S. persons;
  • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations;
  • Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, for reporting interests in foreign controlled corporations and reporting transactions with foreign corporations; and
  • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for reporting interests in foreign partnerships.

Each of these forms captures different types of investments and may apply to both individuals and businesses in different forms.

Penalties

The IRS has identified unreported foreign assets as a key element of U.S. tax evasion.  So too have foreign tax authorities.  As such, the IRS has enacted significant penalties which, coupled with aggressive enforcement, creates a perilous environment for individuals and entities who fail to accurately file these forms. The penalties are very severe, especially considering the fact that the IRS has not made it easy for those with foreign assets to clearly understand what must be reported and how.

The penalties can be very high and reach upwards of $10,000 per form per year.  If the IRS establishes that the taxpayer willfully decided not to file the form, their can be criminal penalties as well as civil penalties reaching upwards of millions of dollars depending on the value of the overseas assets.

For practitioners who know, or reasonably should know, of these unreported or underreported foreign assets, Circular 230 still stands to require disclosure with its penalty provisions.

Resolution Options

Once the issue is identified, the appropriate course of action must be determined.  If the IRS has identified the issue first or the taxpayer has engaged in willful failure to report, the only option is constructing a legal defense.  Those that have experienced this know it to be a potentially very costly experience and more so if criminal penalties are involved.

The most reasonable option to those who otherwise have unreported foreign assets is the  OVDP program.  Taxpayers who voluntarily come forward and provide the IRS with the nature and extent of their undisclosed foreign assets and income are given assurances that the IRS would recommend against criminal prosecution of these taxpayers.  In addition, taxpayers are required to pay all outstanding taxes, interest, and a 20% penalty on the amount of previously unpaid taxes for up to 8 years of noncompliance.  Other various penalties apply depending on the form and the facts and circumstances of the case.

These OVDP penalties, while still sometimes steep, pale in comparison with potential penalties if the taxpayers do not enter into the OVDP and are identified by the IRS.  In addition to potential criminal sanctions, taxpayers could pay up to a 75% fraud penalty for any previously undisclosed income and the greater of $100,000 or up to 100% of the entire foreign bank account balance for each year of willful noncompliance with FBAR requirements.

It is important to note that the OVPD is not the only option available as the Streamlined Procedures Program still exists.  The appropriate option for the taxpayer depends again on the facts and circumstances.

What to do Now

As noted above, the IRS fully intends to continue increasing the number of criminal prosecutions of taxpayers involved in failing to report overseas assets.  Additional disclosure methods continue arising and include foreign banks, e.g., UBS, continuing to enter into non-prosecution agreements with the U.S. Department of Justice.  Additional tools ranging from international tax information sharing agreements to data mining will continue to aggressively identify non-complaint taxpayers.

It is very important for taxpayers who believe they may have issue to immediately determine a plan of compliance and if OVDP is their best option.  Failure to fully evaluate their options before OVDP expires this fall could be very costly.

To learn more about FJV’s foreign tax compliance and tax audit and controversy practices which have considerable experience with this important topic and how it impacts your business and tax positions, please contact FJV Tax or visit us at fjvtax.com.

This article was previously published by the Massachusetts Society of Certified Public Accountants (MSCPA).

The BEPS & FATCA Impact on Transfer Pricing – Prepare for the Future or Return to Basics?

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Frank J. Vari, JD, MTax, CPA

There is certainly no shortage of publicity regarding the impact of BEPS and FATCA on transfer pricing and how to best address these significant new requirements.  This has spurred considerable attention to predicting exactly what the future holds and how to prepare for it.  At this same time, many new rules are similar to historic requirements that a taxpayer maintain global transfer pricing positions that are supported with logic, facts, and documentation.  As we continue to see how these rules will be applied, the question remains whether multinationals in today’s environment should focus entirely on the future or return to basics?

Since the first transfer pricing guidelines were issued by the IRS and OECD, most countries, including the US, have adopted a contemporaneous documentation requirement which remains relatively unchanged as other global transfer pricing rules have greatly evolved.  Multinational corporations prepare this documentation for each taxing jurisdiction where there is either a registered subsidiary or a permanent establishment.  This same documentation also provides compliance with SOX 404 and financial statement reporting requirements including FIN 48.

A key element of the contemporaneous documentation requirement is a risk analysis that describes and allocates business risks amongst the related parties.  This risk allocation is the foundation of the intercompany profit allocation where the related party bearing the majority of the risks in the economic relationship is entitled to the lion’s share of the profits.  The better the quality of the overall documentation and the closer the nexus between this risk analysis and the income allocation the stronger the taxpayer’s position becomes.

Progressive taxpayers have long understood that creating and maintaining strong and appropriate transfer pricing documentation ensures that the taxpayer controls any narrative of its pricing and business practices.  This prevents a tax authority from creating alternative theories about a taxpayer’s intercompany relationships and standards of comparability.  To the extent a taxpayer presents a taxing authority with documentation that does not support or accurately reflect their facts or reporting positions the higher the chances are of a unilateral transfer pricing adjustment and related penalties being forced upon them.

Like existing rules, the new rules address risk allocation.  Specifically, the OECD BEPS Guidelines set out this analytical risk framework:

STEP 1 – Identify the economically significant risks of the business.

STEP 2 – Determine how the economically significant risks are contractually assumed.

STEP 3 – Perform a detailed functional analysis of the economically significant risks to determine which entity controls the risk and has the financial ability to bear the risk.

STEP 4 – Consider whether the contractual assumption of risk identified in Step 2 is consistent with the entities’ conduct identified in Step 3.

STEP 5 – Where the contractual assumption of risk is not consistent with the entities’ conduct, reallocate the risk to the party that assumes it based on conduct in Step 3.

STEP 6 – Perform a transfer pricing analysis based on the delineated transactions after re-allocating risk.

These specific requirements as laid out above may be new but they don’t materially depart from what taxpayers have been historically required to do.  The real change will be to taxpayers that have not adequately analyzed and documented their facts and performed a risk analysis on a jurisdictional basis in a sufficiently detailed manner to defend their existing intercompany profit allocations.

For all multinational taxpayers, the immediate focus should be a renewed understanding of intercompany relationships requiring the tax team to have an even closer relationship with the business product development, operation, and supply chain teams.  This ensures that detailed facts and risks are understood and, more importantly, support the taxpayer’s tax positions.  The need for an ongoing and close relationship with business teams cannot be understated due to the fluid nature of global business practices and the problems that can arise when these practices deviate from reported tax positions.  Taxpayers must now be able to adjust and adapt tax positions at least annually in potentially multiple jurisdictions or risk having any deviations pointed out on audit.

This updated risk analysis requirement is woven into a bevy of new information reporting requirements under both FATCA and BEPS.  A cursory glance at the new business and financial data that now must be filed annually significantly exceeds the information historically reported and certainly that which is publicly reported.  Gathering and reporting this newly required jurisdictional data is loaded with practical difficulties well beyond the scope of this article but it is important to note that information that is now required greatly exceeds a simple updated transfer pricing report.

What remains unchanged is that tax leadership cannot allow any deviation from their actual business practices and the newly required intercompany reporting disclosures to shift control of the transfer pricing narrative away from the taxpayer and give a taxing authority room to create their own models of intercompany profit allocation.  Agreement of all reported information with intercompany profit allocations is necessary.  It is not a new goal but it has certainly become tougher to meet due to significantly increased annual reporting requirements.

This article posed the basic question whether BEPS or FATCA requires a look to the future or a return to the transfer pricing basics?  The answer is mixed.  The requirement of a detailed functional fact and risk allocation analysis tailored to the local country is not new nor is the knowledge that much more detailed information may be required in the event of an actual audit or examination.  What is new is the significantly increased level of detail now required to be reported annually and how to best gather and present that data.  That is a very big change and one that will keep tax departments busy now and for some time to come.

To learn more about FJV’s  transfer pricing practice and our considerable experience with this important topic and how it impacts your business and tax positions, please contact FJV Tax or visit us at fjvtax.com.

This article was previously published by the Tax Career Digest.