Note: This is the fifth and final article in a five-part series. Be sure to read parts one, two, three, and four.
does not like intra-company transfers (neither does any other taxing authority, for that matter). This is a prime reason for Section 482 of the U.S. tax code, which reads:
In any case of two or more organizations, trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion or allocate gross income, deductions, credits or allowances between or among such organizations, trades or businesses, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades or businesses. In the case of any transfer (or license) of intangible property [within the meaning of section 936(h)(3)(B)], the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.
The accompanying Treasury Regulations provide guidance on U.S. transfer pricing rules. The OECD has issued its transfer pricing guidelines, which can be accessed here
. Both organizations are extremely concerned that related organizations will use their relationship to manipulate their respective earnings.
This is an issue at the forefront of the new OECD list of potential actions to prevent BEPS — base erosion and profit shifting
. One of their first concerns is the use of interest deductions between related companies. Action point three states:
Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example, through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments.
One of their primary concerns is the use of a conduit company in an offshore haven to hold financial assets
, which in turn makes a loan to the parent company to drain corporate profits form a high-tax environment to a non-tax environment.
But there are other concerns related to intra-company transfers. Action point eight is to "develop rules to prevent BEPS by moving intangibles among group members," while action point nine is meant to "develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members." Action 10 states to "develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties." And finally there is action point 14, which states to "develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business."
Central to all of these concerns related to intra-company transfers is the creation of a wide corporate structure encompassing many jurisdictions and then using the relationships between the companies to manipulate earnings in a manner not intended or envisioned by the code. All of the recommendations point to new rounds of intensive scrutiny on the part of the OECD.