2023 Marcum Year-End Tax Guide

58

MULTINATIONALS BEWARE: THE SURGE IN TRANSFER PRICING REGULATIONS AND ENHANCED IRS OVERSIGHT BY JIGNASHA VORALIA, FARNAZ AMINI NEWELL, SOPHIA CASTRO JURADO, MELINA NAIDU, ARHEM KHOKHAR

As the dust settles on a post pandemic world, 2023 reveals a landscape where economic certainties have been upended, with ripples of recessionary forces challenging nations’ fiscal policies and regulations. Chief among these challenges is the field of transfer pricing, as multinationals grapple with an evolving regulatory environment. Transparency and reporting emerge as vital tools as governments seek to safeguard their tax bases amid inflationary pressures and dwindling revenues. 2023 has also been a substantive year in pushing forward the OECD’s Pillar One and Pillar Two initiatives 1 . Although these initiatives are focused on large multinational entities engaged in significant

digital commerce, there is a general awareness that local government regulations on this matter are likely, which will most likely impact mid-market multinationals as well. It is not surprising that during 2023, Transfer pricing remained a top tax concern for multinational entities (MNEs), not only because it can result in multimillion-dollar adjustments but also because of its complexity. In 2022, the Internal Revenue Service (IRS) received funding to hire approximately 87,000 new IRS agents to support its review and enforcement objectives. In April 2023, the IRS issued an ambitious strategic operating plan for spending $80 billion in additional funding provided by the Inflation Reduction Act 2 .

During a conference in May 2023, the acting deputy commissioner of the IRS, Jennifer Best, stated that transfer pricing fits within the stated goals of the IRS and now has the funding for the right data analytics tools and the ability to hire specialized staff to increase the scope of transfer pricing reviews 3 . Half of the additional $80 billion in funding for the IRS is expected to be dedicated to compliance enforcement, specifically focusing on MNEs’ transfer pricing activity. Internal sources at the IRS confirmed that additional resources would be used to expand the capabilities of the Large Business and International division (LB&I) to bring advanced data analysis technology to enhance and accelerate their risk

1Pillar one (Pillar I) establishes new nexus and profit allocation rules for large multinational enterprises meeting certain revenue and profitability thresholds. Pillar two (Pillar II) establishes mechanisms to ensure large multinationals pay a minimum 15% tax. 2In August 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the Act), which addressed climate change, healthcare, inflation, and taxes. The Act applied a 15% minimum tax on corporations with over $1 billion in revenue; a 1% excise tax on corporate share buybacks; and about $80 billion of additional funding over 10 years for the Internal Revenue Service (IRS). Changes introduced were applicable to taxable years beginning after 2022 3Gottlieb, Isabel. 2023. IRS to Boost Transfer Pricing Focus with some of its new funding. 18 May. https://www.bloomberglaw.com/product/tax/ bloombergtaxnews/daily-tax-report-international/X819M840000000?bna_news_filter=daily-tax-report-international # jcite

Continued on next page