Daily Tax Update - July 21, 2010

JCT ISSUES REPORT ON TRANSFER PRICING FOR WAYS AND MEANS HEARING: On July 20, the Joint Committee on Taxation released a report on Present Law and Background Related to Possible Income Shifting and Transfer Pricing (JCX-37-10). This report will be discussed at a July 22 hearing of the House Ways and Means Committee, which will also include testimony by Treasury Deputy Assistant Secretary for International Tax Affairs Stephen Shay and Tom Barthold, JCT chief of staff, as well as economists Marty Sullivan of Tax Analysts, William Morgan of Horst Frisch Inc. in Washington, DC; and two University of Michigan Law School professors—Reuven Avi-Yonah (also of Steptoe & Johnson LLP) and James Hines Jr.

  • The JCT Report summarizes the evolution of transfer pricing law from 1986 onward, with a particular emphasis on recent developments regarding cost sharing, including case law (Xilinx and Veritas) and the temporary regulations. The Report also surveys economic studies that indicate that US-based multinationals may be shifting profits to offshore locations. The Report then discusses business restructurings and presents six detailed case studies of US-based multinationals. The case studies were chosen because each of the multinationals reported an effective average worldwide tax rate of less than 25 percent during at least one multi-year period since 1999.
  • In each of the case studies, the Report concludes, “the taxpayers performed a significant portion of the product development, product specification, manufacturing process development and improvement, marketing, patent application process, regulatory approval, trade name development, development of customer relationship, and the creation of other valuable intangible property in the United States, but the rights to exploit the intangible property are either transferred to or licensed by an affiliate in a low-tax jurisdiction.” The Report suggests that “[t]axpayers may reduce their US tax base by organizing their worldwide business to concentrate a significant portion of their more profitable functions offshore in jurisdictions where the average tax rate is low and a significant portion of their more routine and less profitable functions in jurisdictions where the tax rate may be higher.”
  • The Report does not make any recommendations for legislative action, and the hearing is expected to focus on the evidence for profit shifting rather than on specific legislative proposals. However, several such proposals are likely to be discussed, including the Obama Administration’s proposal to tax excess returns from intangibles in low-tax jurisdictions under Subpart F, legislation introduced by Committee member Lloyd Doggett (D-Texas) to eliminate the application of IRC 954(c)(6) (the CFC to CFC payment rule) to royalties and to restrict contract manufacturing structures, further reforms to the cost sharing regulations, as well as more far-reaching proposals such as imposing a minimum tax on the foreign profits of US-based multinationals and adopting formulary apportionment. The hearing is also likely to focus on the interaction between transfer pricing reform and other tax reform proposals such as reducing the US corporate tax rate and exempting dividends paid out of non-Subpart F income.
  • For additional information, contact Philip R. Westpwest@steptoe.com,Michael C. Durstmdurst@steptoe.com, or Reuven Avi-Yonah – Ravi-yonah@steptoe.com.
  • The report can be accessed here.

PRESIDENT SIGNS WALL STREET REFORM BILL INTO LAW: Today, the President signed the “Wall Street Reform and Consumer Protection Act" into law. The President said that the new law represents "the strongest consumer financial protections in history.” The bill includes language that lists potential tax implications under section 1256.

  • A summary of the bill can be accessed here

SENATE DELAYS VOTE ON JOBLESS BENEFITS EXTENSION: Although the unemployment benefits extension bill cleared a procedural hurdle yesterday in the Senate, final passage was delayed. A vote could come as early as today. House Majority Leader Steny Hoyer has said that the House will consider the Senate bill when it becomes available and President Obama is expected to sign it quickly into law.

  • Sens. Susan Collins (R-ME) and Olympia Snowe (R-ME) were the only Republicans who voted to advance the bill. Other Republicans said that the cost of the bill should be offset. Senate Minority Leader Mitch McConnell said, “There's no debate in the Senate about whether we should pass a bill—everyone agrees that we should. What we do not support—and we make no apologies for—is borrowing tens of billions of dollars to pass this bill at a time when the national debt is spinning completely out of control.”

H.R.5783 : Investing in Our Future Act of 2010
Sponsor: Rep Stark, Fortney Pete [CA-13] (introduced 7/20/2010) Cosponsors (None)

H.R.5793 : To amend the Internal Revenue Code of 1986 to close foreign tax loopholes.
Sponsor: Rep Garamendi, John [CA-10] (introduced 7/20/2010) Cosponsors (10)

S.3617 : A bill to amend the Internal Revenue Code of 1986 to provide for an energy investment credit for energy storage property connected to the grid, and for other purposes.
Sponsor: Sen Bingaman, Jeff [NM] (introduced 7/20/2010) Cosponsors (2)

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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