There is growing concern within the IRS that U.S. businesses operating worldwide are not repatriating their non-domestic profits as fast or as fully as regulators might like. Of particular concern is the potential under-reporting of inbound distribution arrangements. As a result, the IRS will make greater use of globally available data, under the Foreign Account Tax Compliance Act (FATCA) and other international agreements, to increase its scrutiny of transfer-pricing structures and operations outside of the U.S.
In August, the IRS Criminal Investigation (CI) unit announced a new initiative to specifically target cross-border activity by U.S. businesses with foreign operations. In addition, the IRS Large Business and International (LB&I) division announced 13 new campaigns to identify non-compliance and cross-border discrepancies. The IRS’s stated objective is to better leverage data it gathers from US-headquartered companies and their foreign subsidiaries and improve training and other internal infrastructure. Four of the 13 campaigns, in particular, will likely have an impact on mid-market businesses and ‘micro-multinationals’ trading cross-border.
Related Party Transactions Campaign
The IRS’s website makes clear that LB&I will be focused on transactions between ‘commonly controlled entities’ trying to move funds from corporations to related pass-thru entities or shareholders in order to determine the level of compliance in the mid-market segment.
The IRS has determined that many mid-market taxpayers use different repatriation structures to achieve tax-free repatriation of funds into the U.S. and therefore do not properly report repatriations as taxable events on their tax returns. Its goal for this campaign is to increase taxpayer compliance by improving its ability to identify and conduct examinations on high risk repatriation issues.
Form 1120-F Non-Filer Campaign
The IRS has identified that many international companies doing business in the U.S. are not filing the required Form 1120-F. Through this campaign, the IRS will identify companies that have failed to comply and request that they file the required return. The agency will investigate those companies that fail to take appropriate action.
Inbound Distributor Campaign
This campaign includes a dedicated training program for IRS staff on arms-length transactions that is likely to lead to increased scrutiny and, consequently, more frequent issue-based examinations of inbound distributors in the U.S. The concern is that inbound distributors are understating their U.S. income in relation to what would be reported in arms-length transactions.
What should mid-market businesses be doing now?
We recommend that companies with multiple operations in Europe and worldwide begin a thorough review of arms-length arrangements and documentation systems as soon as possible and take appropriate action, if needed, to ensure compliance. WBL’s in-house international tax experts are available to discuss any concerns clients or friends of the firm may have about the IRS campaigns, repatriation of foreign profits or inbound distribution arrangements.