Fri, Dec 30, 2016

Transfer Pricing Times: Volume XIII, Issue 8

In this edition: IRS and Treasury Release Final 367 Regulations Covering IP Transfers, Norway’s Supreme Court rules IKEA’s Restructure to be Tax-Motivated, IRS Releases Draft Country-by-Country (“CbC”) Reporting Forms. 

IRS and Treasury Release Final 367 Regulations Covering IP Transfers
On December 15th the IRS and Treasury released final regulations under Section 367 titled the “Treatment of Certain Transfers of Property to Foreign Corporations”. Most noteworthy, the finalized rules do not deviate in a material way from the proposed 367 regulations released in September 2015. As stated in the preamble: “(T)he final regulations are not intended to be interpreted as making substantive changes to those regulations.”

The IRS and Treasury received a number of comments concerning a potential exception for foreign goodwill and going concern value. However, the IRS points out in the preamble that commenters on this point presented “widely divergent understandings of the nature of foreign goodwill and going concern value”. The IRS ultimately pointed to this lack of consensus amongst the commenters as one of the justifications for not permitting favorable treatment of foreign goodwill and going concern under the finalized version of 367.

The final regulations will keep the date of September 14, 2015 from the proposed regulations as the date of applicability for transfers covered by 367.

A link to the final regulations is available here.

Norway’s Supreme Court rules IKEA’s Restructure to be Tax-Motivated
On October 18th, the Norwegian Supreme Court ruled that Norway’s tax administration was within its rights to deny approximately $53.5 million of interest deductions to a subsidiary of the Swedish furniture retailer IKEA. The Supreme Court’s ruling is supported by the conclusion that the company’s restructuring was largely tax-motivated.

The dispute follows a 2007 restructuring, where Norwegian stores were spun off from IKEA Handel & Eiendom, a Norweigian entity, into seven different companies. The companies were subsequently sold to a newly founded Norweigian holding company in the Netherlands. Several months later, IKEA Handel & Eindom repurchased the stores back for $256 million, financed by a loan from IKEA’s internal bank in Belgium. IKEA cited commercial reasons for the restructuring, claiming that it gave them more financial flexibility. Following the restructure, $53.5 million in tax deductions on the interest payments were taken between 2008 and 2012.

The question put to the Court was whether the interest on the loan was to be denied as a deduction pursuant to § 13-1 of the Tax Act (the arm’s length principle), or the non-statutory general anti-avoidance rules (“GAAR”). The Supreme Court ruled against IKEA in favor of the State and denied IKEA tax deductions on the inter-company interest cost on the basis of GAAR, showing that the primary motive of the restructuring was to avoid tax.

The ruling is significant for multinational companies operating in Norway. The decision demonstrates the ability of the Norwegian tax authority to actively pursue cases under GAAR as a supplement to or alternative for adjustments made under transfer pricing rules. The case clearly illustrates the importance of economic substance versus legal form and nations other than Norway may look to the case with enhanced confidence of pursuing tax-driven transactions within their jurisdiction.

The Court’s decision (in Norwegian) can be found here.

IRS Releases Draft Country-by-Country (“CbC”) Reporting Forms
On December 8th, just in time for the holidays, the IRS gifted taxpayers a sneak peak of their draft CbC reporting forms. The draft IRS version of this matrix is nearly identical in substance to that published by the OECD.

Draft Form 8975 calls for taxpayer identification information while the accompanying Schedule A to Form 8975 contains the CbC matrix. Starting in 2017, US taxpayers with group revenues in excess of $850 million will be required to complete Form 8975/Schedule A. The draft IRS template calls for the following information for each controlled entity, consistent with the template put forth in the OECD guidance:

  • Revenues (segmented by third party and related party);
  • Profit (loss) before income tax;
  • Income tax paid (on cash basis);
  • Income tax accrued – current year;
  • Stated capital;
  • Accumulated earnings;
  • Number of employees; and
  • Tangible assets other than cash and equivalents. 

Only taxpayers whose ultimate parent resides in the US will be required to file Form 8975/Schedule A. Otherwise the CbC matrix should be filed in the jurisdiction in which the ultimate parent resides.

A link to Draft Form 8975 is available here.

A link to Draft Schedule A is available here.

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