Multinational businesses operating in the country could face stricter tax-compliance rules as a result of new rules proposed by the Internal Revenue Service and the Treasury Department.

The Internal Revenue Service and the Treasury Department issued proposed regulations revamping how companies account for the transfer of services and intellectual property to their affiliates in and outside of the United States. The rules, which are designed to close loopholes that have allowed companies to shift tax liabilities into lower-tax jurisdictions, are likely to take effect Jan. 1.

The proposed and temporary regulations would:

  • Reduce administrative and compliance burdens for low-margin services;
  • Ensure that valuable intangibles cannot be transferred outside the United States for less than arm's length consideration;
  • Update guidance on the transfer pricing methods to determine the arm's length price in a services transaction; and,
  • Coordinate the rules applicable to services related to intangibles with the transfer pricing rules applicable to transfers of intangible property.

Currently, if a company makes a product in the United States and then ships it to its foreign operations to be sold, the profit from the product comes back to the U.S. headquarters to be taxed accordingly. That process is murkier when a company develops intellectual property.Both agencies are still accepting comments on the new regulations, which spell out various scenarios, such as accounting, auditing and staffing, that the IRS would automatically accept so the company wouldn't have to show the tax income breakdown. The IRS regulations hadn't been updated since 1968.
More information on the changes is available at www.ustreas.gov/press/releases/hp40.htm.

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