The IRS Large Business & International (“LB&I”) division recently announced three new compliance campaigns affecting transfer pricing. The goal of LB&I’s new campaigns is to improve return selection, identify issues representing non-compliance risks and ensure the efficient use of limited resources. The compliance campaigns are:
Captive Services Provider Campaign – This campaign concerns arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or another member of a multinational group. Examples of this include buying an office or a limited risk distributor.
|The goal of this campaign is to ensure that U.S. multinational companies are paying their captive service providers no more than arm’s length prices. If you are a taxpayer who engages in this type of related-party transaction, you need to confirm that your transfer pricing is based on arm’s-length principles and that you have the proper documentation to support your transfer pricing positions.|
Loose Filed Forms 5471 – This campaign focuses on incorrectly filed Form 5471s (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) that must be attached to an income tax, partnership or exempt organization tax return, when applicable. The IRS has noted that some taxpayers are sending a Form 5471 without attaching it to a tax return.
|The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return. This campaign applies to U.S. taxpayers who are: (i) required to file Form 5471; and (ii) has control of a foreign corporation and have made any of the transactions described on Schedule M of the Form 5471 (a related party transaction). Taxpayers subject to these conditions should have a transfer pricing study completed prior to filing the Form 5471.|
Offshore Private Banking Campaign – This campaign addresses tax noncompliance and the information reporting associated with offshore accounts.
Given the IRS’ limited audit resources, some taxpayers may have doubts about the value of maintaining contemporaneous documentation justifying the terms of related party transactions. With the IRS' new focus on this issue, the risk of audit and related tax adjustments incurring interest and penalties, has increased significantly.
If you are a taxpayer with cross-border related party transactions and do not have a contemporaneous transfer pricing study supporting the pricing for those transactions, please contact David Slemmer, Friedman’s Director of Transfer Pricing, or a Friedman advisor to assess, and help mitigate, associated risks.