IRS' INTERNATIONAL HIT LIST

IRS Commissioner Douglas Shulman recently spoke to the George Washington University International Tax Conference. The Commissioner addressed several areas that the IRS is concerned about in the international arena. With such expressions of concern, taxpayers with interests in these areas should be forewarned that stricter or adverse IRS attention to these areas can be anticipated (although some of these areas are already feeling the heat).

TRANSFER PRICING - COST SHARING. The Commissioner is concerned that taxpayers are abusing existing transfer pricing cost sharing mechanisms to shift taxation of profits from valuable intangibles (e.g., new drugs) to offshore, low-tax jurisdictions. He indicated that the IRS is challenging such arrangements at audit when taxpayers are perceived to be crossing the line, and are also working on temporary regulations in the area.

CONTRACT MANUFACTURING. Subpart F of the Code attempts to tax foreign corporations controlled by U.S. persons on a current basis on profits that relate to sales of products that are involved in certain related party sales, instead of allowing taxes to be deferred offshore. Taxpayers have developed mechanisms of reducing exposure to Subpart F by engaging in contract manufacturing between related foreign companies. IRS attacks in regard to transfer pricing reviews of contract manufacturing pricing, and expansion of Subpart F income definitions and the "branch rule" to include contract manufacturing activities, are likely.

USE OF LOW OR NO TAX JURISDICTIONS BY FINANCIAL INSTITUTIONS. Attempting to book transactions as loans and swaps to shift profit to such jurisdictions, is something the IRS is concerned about.

USE OF HYBRID ENTITIES TO OBTAIN DOUBLE DEDUCTIONS OR CREDITS IN VARIOUS JURISDICTIONS. The IRS is concerned about hybrid entities abusing foreign tax credits - if two different taxpayers are getting the benefit of a credit, watch out.

AVOIDANCE OF WITHHOLDING TAXES. The IRS is concerned about institutional assistance by financial institutions in regard to foreign persons avoid U.S. withholding taxes.

UNDISCLOSED FOREIGN BANK ACCOUNTS OF U.S. PERSONS. Well, I think we all know the IRS is big on this issue (e.g., the recent UBS problems in Switzerland).