Recognising the inexorable globalisation of business and underscoring the high priority that top management places on international tax compliance, the Internal Revenue Service (IRS) recently announced a realignment of its Large and Mid-size Business Division into a new Large Business and International Division. In its own words, this will "create a more centralized organization dedicated to improving international tax compliance". The number of employees in the international programme will be more than doubled by bringing in examiners, economists and technical staff who work on international issues in other parts of the division.

The IRS explained that enhancements enabled by the realignment include:

  • identifying emerging international compliance issues more quickly;
  • removing geographic barriers so as to help dedicate efforts to the most pressing international issues;
  • increasing international specialisation among IRS staff;
  • allocating the right compliance resources to the right cases;
  • consolidating oversight of international information reporting and implementing new programmes (eg, the Fair and Accurate Credit Transactions Act); and
  • coordinating the competent authority process more closely with originating field personnel, especially in transfer pricing matters.

Notably, there will be a transfer pricing director, who will handle the recently established Transfer Pricing Practice within the division (for further details please see "IRS launches new Transfer Pricing Practice"), and a chief economist, who will oversee economic positions pertaining to transfer pricing. Consistent with recent trends, the planned IRS realignment will be 'virtual' in nature, with little or no physical relocation of personnel. The IRS Appeals Office recently strengthened its own international programme, consolidating and sharpening its expertise in international matters, including transfer pricing.

The individuals who will serve in the two new transfer pricing positions have not yet been publicly named. The current division commissioner (Heather C Maloy) and deputy commissioner, international (Michael Danilack), will continue in equivalent positions in the new division.

This focused restructuring, together with organisation of the new Transfer Pricing Practice and its pilot enforcement programme, unequivocally signals an intensified emphasis (if not dragnet) on transfer pricing examination and enforcement. One of the reorganisation's informal goals is to eliminate bureaucratic 'silos' that sometimes prevented assignment of the most capable IRS analysts and reviewers to high-value transfer pricing cases. Taxpayers are clearly on notice to buckle down and get their transfer-pricing houses in order! This should include a review of transfer pricing studies for all significant related-party, cross-border transactions to be sure that they are in place, thoughtful and up-to-date. It is an ideal time to consider entering into advance pricing agreements with the IRS and treaty partners to eliminate transfer pricing exposure. Advance pricing agreements are also highly desirable from the perspective of FIN 48 accounting disclosure rules, as well as the impending IRS uncertain tax position tax return forms (expected to be in place for 2010 returns).

The IRS move comes on the heels of a July 22 House Ways and Means Committee hearing on transfer pricing, accompanied by an extensive report from the Joint Committee on Taxation entitled "Present law and background related to possible income shifting and transfer pricing". The report explored in detail six real (but sanitised) cases of large US multinational companies with exceptionally low global effective tax rates, implicitly enabled by various transfer pricing structures. Most involve 'stripped' affiliates and/or transfers of valuable intangibles. There is no doubt that these types of situation are on the radar screen of lawmakers, although the likelihood of near-term legislative changes is unclear. Various proposals are floating around, including major intangibles-related proposals in the administration's FY 2010 budget. Stimulation of IRS enforcement of existing rules is another – or parallel – consequence.




For further information on this topic please contact Patricia Gimbel Lewis, H David Rosenbloom or Neal M Kochman at Caplin & Drysdale by telephone (+1 202 862 5000), fax (+1 202 429 3301) or email (, or


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