IRS Forms ‘SWAT Team’ for Tax Dodger Crackdown
The U.S. Internal Revenue Service is staffing up with high-powered talent to crack down on companies shifting profits from country to country to lower their tax bills, a strategy the agency has targeted before with only limited success.
The IRS showed its elevated concern on the issue, known as “transfer pricing,” last May by hiring Samuel Maruca to fill the newly created post of transfer pricing director.
He has since brought aboard specialists from Big Four audit firms KPMG and Ernst & Young LLP, as well as law firm Mayer Brown and boutique consultancy Horst Frisch.
Maruca, who came from law firm Covington & Burling, is still recruiting. He told Reuters the agency previously had “had a difficult time attracting and retaining economists.”
Now, he said, the IRS’s international group “has significant external hiring authority.”
Transfer pricing is a booming field of global tax law. It involves multinational corporations that are constantly moving goods, services and assets from one subsidiary to another in different countries and how they account for these “transfers.”
By carefully manipulating the pricing of such moves, companies can effectively shift profits to low-tax countries from high-tax ones, lowering their overall tax costs.
Governments in the developing and developed world, many of them faced with crushing deficits, are working to curb transfer pricing because it reduces corporate tax revenues.
IRS Commissioner Doug Shulman made changes at the agency in mid-2010 that set the stage for bringing in Maruca, who has filled 40 positions so far and plans to bring on up to 60 more staffers.
The IRS, which employs 90,000 people, saw its budget cut by 2.5 percent by Congress for fiscal 2012 to $11.8 billion.
UNDERPAID AND OUT-GUNNED
Federal agencies often struggle to keep up with higher-paid private-sector professionals. The IRS is no exception and there is some skepticism about Maruca’s chances.
“The economic crisis allowed the IRS to attract talented, experienced industry professionals who might not have been available previously,” said ex-deputy IRS Commissioner Michael Dolan, now director of KPMG’s Washington national tax practice.
“The $64,000 question is, what will be able to do … and will he really have enough resources to change the game?”
To curtail tax avoidance through transfer pricing, governments seek to limit the ability of corporations to manipulate transfer prices. National laws, though variable from country to country, generally call for “arms-length” pricing.
In theory, that means corporations must set transfer prices that are at or near market level, not artificially raised or lowered. But enforcement is complex, especially for intangible assets, s uc h as search-engine algorithms or trademarks.
“The valuation problems are insurmountable,” said Edward Kleinbard, a professor at the University of Southern California and former chief of staff at the Joint Committee on Taxation, which analyzes tax policy for the U.S. Congress.
“There are billion-dollar disputes on just the arms-length transfer pricing of intangibles.”
In December, payment transfer firm Western Union Co announced it was part of a $1.2 billion transfer pricing settlement with the IRS for taxes owed from 2003 through 2011. The dispute included intangible property and trademark royalties.