The U.S. is on the rise.
The Internal Revenue Service (IRS) recently released its 2012 statistics on Competent Authority proceedings. For the first time in a long time, the U.S. reported a significant increase in the number of U.S.-initiated transfer pricing (allocation) cases from 25 to 51—a 104 percent increase.
This is good news—even though the 51 cases represent less than 30 percent of the total cases before the U.S. Competent Authority. It shows that the U.S. has re-engaged in transfer pricing, and is following through on its recent pronouncements to take a new, closer look at how it is evaluating transfer pricing cases, bringing a little more balance back to this international dispute resolution mechanism.
The Competent Authority is the person or office designated to represent a country’s government and its resident taxpayers with respect to transactions involving another country, and where such transactions are covered by a tax treaty between the two countries. A Competent Authority case typically involves a claim of underpayment (additional tax due) in the assessing country versus an overpayment (refund due) in the other country. The Competent Authority process is intended to ensure that the right amount of tax is allocated to each country and that the taxpayer does not incur double tax.
So, given that the U.S. has one of the highest statutory tax rates—why is this good news—and for whom?
In general, balance is good—a balanced life, a balanced diet, and a balance of power in this case. It’s good for the international tax system and treaty negotiations when opposing Competent Authorities have a more equal number of self-initiated cases. A more balanced Competent Authority docket should also be good for taxpayers in terms of leading to quicker and more efficient (less costly) resolutions, as well as more rational, principle-based resolutions.
The international community is in a bit of a mess right now—soaring deficits, stagnant economies, and a lack of consensus—if not outright battle—on the direction and even principles on the way forward, notably in the tax realm.
Governments around the world are fighting multinationals and one another, scrambling for revenue and aggressively defending their tax base. Multinationals, too, are fighting to remain competitive and to retain or enhance shareholder value in the midst of government austerity and lackluster growth. On top of this, or perhaps at the root of this, emerging giants India and China are challenging the Organization for Economic Co-operation and Development (OECD) and existing international order over the fundamental principles of international taxation.
Developing countries with their large populations and growing economies are vociferous in their insistence of garnering greater (primary?) taxing authority for source countries and labor service contributions. Developed industrial countries would prefer to maintain the existing scheme of residence-based taxation and its preference toward contributions of capital (physical, financial and intellectual) exports—however, they do recognize the problems with the current system, including the shifting of profits and avoidance or minimization of tax (see the recent OECD Base Erosion and Profit Shifting report) and the changed state of the modern, intellectual capital-based economy.
What is needed right now is a bit of leadership, or at least a counterweight in this tax battle. These numbers may be read as the latest sign that the U.S. is reasserting a leadership role in emerging international tax issues, especially transfer pricing.
Over the last half dozen years, the U.S. has in fact taken the lead on several major international initiatives. Under former IRS Commissioner Shulman, and several of his foreign tax counterparts, the IRS has pushed for greater transparency in corporate reporting and increased information exchange and cooperation among governments. These efforts lead to the introduction of Uncertain Tax Position (UTP) reporting in the U.S. and several other countries, a revival and proliferation of Tax Information Exchange Agreements (TIEAs), and changes in bank secrecy laws. These developments in turn paved the way for the U.S. to enact the Foreign Account Tax Compliance Act (FATCA) legislation and accompanying regulatory regime to track offshore financial flows (interest, dividends and the like). On the transactional side, the U.S. has also been a major impetus behind the increased use of joint or simultaneous audits and the expansion, both in terms of membership and activity, of the Joint International Tax Shelter Information Center.
The U.S. has managed to develop a bit of cooperative momentum with various multi-lateral efforts—although a number of major challenges remain—the more immediate test (and potential benefit) for U.S. taxpayers is within the bilateral context, in terms of whether or not the efforts and outcomes achieved within Competent Authority will produce similar positive results for the U.S.
One highly visible test case in this regard, which is being played out now, is India Competent Authority cases. The U.S. Competent Authority has put a “freeze” on the 140 bilateral cases it has with India. The U.S. insists that India “play by the rules” of its existing treaty (which also happens to be the current model for most international treaties) and not seek to unilaterally and arbitrarily negotiate each case anew. India, of course has its own view of the matter, but if it is unable to quickly resolve this impasse, or at least put it back on track, this could seriously slow India’s continued economic growth and expansion. See India at the Crossroads.
If the U.S. is able to somehow move its Competent Authority cases with India ahead, its leadership status will soar. That will not only be good for the U.S. (and India) but the entire international community as well.