Financier Worldwide Indepth Feature: Global Tax 2023
Q: What do you consider to be among the key developments affecting corporate tax in your country of focus over the last year or so?
Armitage: The Supreme Court will likely overturn section 965, the 2017 statute that deemed US shareholders of controlled foreign corporations to have repatriated the earnings of up to the last 30 years, when it rules in Moore v. United States. The decision could have far reaching implications if the court bases its decision on the conclusion that the Moores, who were minority shareholders in an Indian corporation, did not ‘realize’ the income. Other situations where income is not realized may include Subpart F, the global intangible low-taxed income (GILTI) regime, partnership taxation, S corporation taxation, the accumulated earnings tax, and others, many of which are central elements of the US income taxation statutory scheme. A decision should be out in the first half of 2024.
Q: To what extent have tax authorities in your country of focus increased their monitoring and enforcement activities?
Armitage: In legislation passed in 2021, the US dramatically increased the budget – by $80bn over 10 years – of its tax enforcement arm, the Internal Revenue Service (IRS). In April 2023, the IRS published a plan for spending the monies. The plan dedicates some $46bn to enforcement activities, an increase of 69 percent. The plan makes clear that the IRS will focus its enforcement effort on high-net-worth individuals. While the fruits of the IRS efforts have not yet been seen in a material way, it can be expected that the audit rate on high-net-worth individuals will increase materially in the immediate future.
Q: How are tax authorities approaching the issue of transfer pricing? In your experience, do companies tend to underestimate the risks and challenges in this area?
Armitage: The IRS continues aggressive efforts to audit and enforce the transfer pricing (TP) rules. These efforts have led to numerous large adjustments and resulting court cases involving large US-based multinationals. Companies understand the risks of IRS TP enforcement and generally are well prepared to defend their positions. The preparation includes developing documentation to avoid penalties, filing for advance pricing agreements and ensuring global consistency of their TP approaches. With its increased budget, we expect the IRS to expand the scope of its TP enforcement efforts to ensure high-net-worth individuals are properly pricing transactions among their closely held companies. Our experience is that most closely held companies have a strategy for ensuring their TP is appropriate, but that they often have fewer resources to dedicate to documentation and other pre-audit compliance efforts. They likely are as or more vulnerable to a TP audit than large multinational companies. We will have to wait and see exactly how the IRS approaches this space.
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