International Corporate Compliance (Outbound)
Captive Services Provider Campaign
- Rollout: April 16, 2019
- LB&I Summary: The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group.
- The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary.
- Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the U.S. tax base. 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. The treatment streams for this campaign are issue-based examinations and soft letters.
Corporate Direct (Section 901) Foreign Tax Credit (“FTC”)
- Rollout: November 3, 2017
- LB&I summary: Domestic corporate taxpayers may elect to take a credit for foreign taxes paid or accrued in lieu of a deduction. The goal of the Corporate Direct FTC campaign is to improve return/issue selection (through filters) and resource utilization for corporate returns that claim a direct FTC under IRC section 901. This campaign will focus on taxpayers who are in an excess limitation position. The treatment stream for the campaign will be issue based examinations. This is the first of several FTC campaigns. Future FTC campaigns may address indirect credits and IRC 904(a) FTC limitation issues.
- Relevant LB&I Practice Units: “Creditable Foreign Taxes” (September 14, 2017); “FTC General Principles” (April 11, 2017); “Summary of Foreign and Domestic Loss Impacts on the Foreign Tax Credit” (March 1, 2017), “Sourcing of Multi-Year Compensation Arrangements Including Stock Options for FTC Limitation” (September 23, 2016).
Foreign Base Company Sales Income: Manufacturing Branch Rules
- Rollout: September 10, 2018
- LB&I Summary: In general, foreign base company sales income (FBCSI) does not include income of a controlled foreign corporation (CFC) derived in connection with the sale of personal property manufactured by such corporation. However, if a CFC manufactures property through a branch outside its country of incorporation, the manufacturing branch may be treated as a separate, wholly owned subsidiary of the CFC for purposes of computing the CFC’s FBCSI, which may result in a subpart F inclusion to the U.S. shareholder(s) of the CFC.
- The goal of this campaign is to identify and select for examination returns of U.S. shareholders of CFCs that may have underreported subpart F income based on certain interpretations of the manufacturing branch rules. The treatment stream for the campaign will be issue-based examinations.
- Relevant LB&I Practice Units: “Branch Rules for Foreign Base Company Sales Income,” “Branch Sales to Unrelated Parties of Products Manufactured by CFC,” “Sale by CFC to Unrelated Parties of Products Manufactured by Branch.”
- Rollout: January 31, 2017
- LB&I summary: LB&I is aware of different repatriation structures being used for purposes of tax free repatriation of funds into the U.S. in the mid-market population. It has also been determined that many of the taxpayers do not properly report repatriations as taxable events on their filed returns. The goal of this campaign is to simultaneously improve issue selection filters while conducting examinations on identified, high risk repatriation issues and thereby increase taxpayer compliance.
- IP&B comment: this campaign is preliminary. According to LB&I comments from May, 2017, the agency was focused on identifying “objective indicators” of repatriation risk in order to better select returns for examination. The campaign does not focus on any particular repatriation technique.
Repatriation via Foreign Triangular Reorganizations
- Rollout: July 2, 2018
- LB&I summary: In December 2016, the IRS issued Notice 2016-73 (“the Notice”), which curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.
Section 956 Avoidance
- Rollout: November 3, 2017
- LB&I summary: If a Controlled Foreign Corporation (CFC) makes a loan to its US parent, Section 956 generally requires an income inclusion equal to the amount of the loan. This campaign focuses on situations where a CFC loans funds to a US Parent (USP), but nevertheless does not include a Section 956 amount in income. The goal of this campaign is to determine to what extent taxpayers are utilizing cash pooling arrangements and other strategies to improperly avoid the tax consequences of Section 956. The treatment stream for this campaign is issue based examinations.
- Relevant LB&I Practice Units: “Calculation of the IRC 956 Inclusion” (December 13, 2017).
Section 965 Transition Tax
- Rollout: July 2, 2018
LB&I summary: Section 965 requires United States shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions).
- Earlier this year, LB&I engaged in an outreach campaign to leverage the reach of trade groups, advisors and other outside stakeholders to raise awareness of filing and payment obligations under this provision. The external communication was circulated through stakeholder channels in April 2018.