This past week, Symantec Corp., the maker of Norton AntiVirus software, received a $1 billion tax assessment for improper transfer pricing. The IRS alleges Symantec undervalued a license agreement with its Irish subsidiary. This result is especially unfortunate because it could have been avoided through an Advance Pricing Agreement ("APA") with the IRS.
Many multinational companies move their intangible assets offshore to a subsidiary in a jurisdiction with a tax rate significantly lower than the US. Then the two related companies enter into an agreement to share the costs of ongoing research and development. As the foreign subsidiary exploits the intangible, it pays lower tax on the income it earns.
The tax risk is that IRS rules require the foreign subsidiary to compensate the US parent for the value of the intangible, and value is difficult to determine. The IRS may well disagree with the taxpayer on value, as occurred in the Symantec case.
However, the taxpayer can get insurance against this risk ahead of time by entering into an APA with the IRS before the transaction. An APA is a prospective agreement between the taxpayer and the IRS that binds the taxpayer to a transfer pricing methodology that ensures arm’s length pricing. The taxpayer voluntarily discloses information about its transaction and in return, the IRS will not challenge the methodology on audit. For additional information about whether an APA is right for your company, see the attached article. Negotiating with the IRS ahead of time allows the taxpayer to move intangibles abroad while avoiding the Symantec problem.
For further information, please contact Mindy Piatoff at (202) 772-5339, who served as Acting Director of the IRS Chief Counsel’s APA program before joining Sheppard, Mullin, Richter & Hampton LLP as Special Counsel in August 2005.