Demand Grows for Transfer Pricing Specialists
The IRS has cut finance execs at multinational corporations some slack. The agency issued, on January 5th, its highly anticipated revisions on cost-sharing arrangements for multinational companies that provide some extra flexibility in transfer pricing schemes, according to WebCPA. The cost-sharing arrangements addressed apply to multinational companies and their foreign partners that share in the costs of developing intangible property such as patents and software code. WebCPA adds the proposed and temporary new cost-sharing regulations supersede the previous rules issued in August 2005 which many critics believed to be unworkable and simply unfair.
Transfer pricing is the pricing of goods and services, including raw materials, products, and payments such as management fees as well as intangible assets, such as intellectual property, within a multi-divisional corporation. (Essentially, when one subsidiary sells goods or services to another subsidiary in a different country, the price charged for these goods or services is called the transfer price.)
More specifically, companies seeking to develop intangible assets may enter into cost-sharing arrangements (or cost-contribution arrangements). Such arrangements allow the parties to an agreement to share costs relating to the development of intangible property based on their anticipated share of its potential benefits. According to transferpricing.com, cost-sharing arrangements have been particularly popular among U.S. software developers with affiliated entities abroad.
The new transfer pricing rules issued on January 5th by the IRS apply to such intangible assets like patents and trademarks whose development costs are shared by operating divisions in more than one country.
Congress first sanctioned the cost-sharing arrangements in 1986, and the IRS released regulations on them in 1995. In 2005, however, the IRS proposed new tougher cost-sharing regulations, which have since drawn sharp criticism from many business groups. Many companies viewed the 2005 regulations as too restrictive and pushed for more flexibility in how to value intangible property. Critics of the 2005 regulations went as far as to say they would have a “chilling effect” on taxpayers entering into cost-sharing arrangements.
Now, in the latest proposed regulations, the IRS has provided more flexibility, but has not backed away completely from many of the 2005 restrictions, according to WebCPA. The report quotes Canale as saying, “They’re not draconian now, but they are still very restrictive.” The IRS’s revisions still require that any transaction be done at “arm’s length,” or as if it was conducted between unrelated parties. But they do allow a company to allocate costs among operating divisions based on considerations other than territory. For example, companies operating in multiple jurisdictions may allocate the costs of research and development based on the income they expect from individual business lines – not just by geographic areas. The IRS has also expanded the definition of what needs to be valued, including research teams, adds WebCPA. The new rules, however, still require that all the costs of an arrangement be allocated to its parties, that the allocations not overlap, and that they be perpetual and exclusive.
The temporary new proposed regulations are currently effective, but the IRS has three years to put them in final form and there will be another public hearing in which interested parties can provide further comments on the proposed regulations, notes WebCPA.
Despite the revisions, critics suggest the government (facing a projected $1.1 trillion budget deficit) is still trying to protect the public by preventing companies from shifting all income from a copyright or patent to a jurisdiction where the U.S. gets no tax revenue.
Since tax rates vary between countries, multinational corporations can increase their profits with the help of transfer pricing. By lowering prices in countries where tax rates are high and raising them in countries with a lower tax rate, corporations can reduce their overall tax burden and boost profits. This has led to the rise of transfer pricing regulations which are designed to prevent multinational companies from minimizing taxes by shifting income to operations in countries with lower rates. In short, The IRS and numerous tax authorities worldwide are seeking to stem the flow of taxation revenue overseas by intensifying their focus on how corporations allocate income and expenses among related entities abroad. As a result, transfer pricing audits are increasing, and tax authorities are willing to impose adjustments and penalties, according to Ernst & Young’s Global Transfer Pricing Survey 2007-2008.
Tax authorities across the globe are also recognizing the significant revenue opportunities presented by high-technology companies that routinely move assets between jurisdictions in the normal course of adding value to the products they develop, produce and sell, according to KPMG. The firm states that this increased interest in transfer pricing by local authorities has heightened compliance requirements and the need for transfer pricing awareness by high-tech multinational companies. KPMG adds the negative impact on multinational corporations resulting from transfer pricing actions taken by taxing bodies can include high costs associated with audits, negative publicity and the potential for declining market capitalization.
Now, facing economic uncertainty and globalization, governments around the world have begun imposing tighter trading rules and aggressively pursuing tax revenues. As a result, multinational organizations must minimize their tax liability and audit exposure. In order to mitigate tax risk on all cross-border market driven initiatives, transfer pricing specialists must manage the development of complex transfer pricing design, compliance and audit defense strategies. As a result, demand is escalating for talent with expertise in international tax, particularly international transfer pricing controversy and advanced pricing agreements.
From supply chain restructuring, to transfer pricing planning and compliance with documentation requirements, executive search firm, A.E. Feldman says that international tax jobs are opening up. A.E. Feldman President, Mitch Feldman, also notes that talent with expertise in complex transfer pricing matters, particularly international transfer pricing controversy and advanced pricing agreements are among the most sought after candidates.
Are you an accountant or transfer pricing specialist? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
