Marcum 2021 Year-End Tax Guide

CONTROVERSY UPDATES Since Marcum’s 2020 Year-End Tax Guide, two major transfer pricing controversy cases reached major milestones: Altera Corp. v. Commissioner and Coca-Cola v. Commissioner. The Supreme Court declined to hear Altera’s appeal of the Ninth Circuit’s decision in Altera v. Commissioner. The Ninth Circuit upheld the rule under Treasury Regulation Section 1.482-7(A)(d)(2), which requires the inclusion of stock-based compensation in the calculation of intangible development costs for cost-sharing arrangements. The Supreme Court’s denial was Altera’s last point of appeal in the case. However, the issue could still be presented in future court cases. In Coca-Cola v. Commissioner , the tax court ruled in November 2020 in favor of the IRS, resulting in an additional USD 3.3 billion tax liability for Coca-Cola. The case centered on the ownership of marketing intangibles, which Coca-Cola claimed were partially owned by its foreign affiliates known as “supply points.” The tax court opinion relied on the lack of support in the intercompany agreements for the allocation of intangible property rights, and the observation that Coca-Cola could not indefinitely rely on a closing agreement with the IRS from a 1996 audit to provide certainty on its transfer pricing methods. In addition, the tax court showed surprising support for the application of the “comparable profits method” for intangible property transactions.

» Review licensing arrangements pertaining to foreign related party IP. » BEAT related party payments do not include cost of goods sold or services eligible for the service cost method; explore planning ideas related to these exceptions.

• For FTC

» Review planning strategies in light of potential elimination of FTC carrybacks.

• CbC reporting should continue to be a focus for MNE taxpayers. MNE taxpayers should continue to be diligent in preparing accurate CbC information and/or contemporaneous documentation, to provide penalty protection in the event of a transfer pricing adjustment upon examination. » If the taxpayer is required to file the CbC report for Country A, but is filing the report in Country B, the taxpayer may also need to notify Country A that the report will be filed in Country B. In some jurisdictions, this notification is due before the end of the taxable year for the CbC report. » Some jurisdictions do not have agreements in place to exchange CbC reporting information. In this case, multiple filings may be required. » Review current supply chains and utilize transfer pricing planning in conjunction with commercial considerations to establish new structures. » Review current transfer pricing positions with respect to generated losses and support the loss position through transfer pricing documentation. » Review the possibility of providing holidays on charging interest rates on intercompany financing and on charging for intercompany services and royalties. » Review and update intercompany agreements for any legal clauses and align with third party agreements to support the transfer pricing position taken. » Review transfer pricing in line with the CARES Act stimulus and see if transfer pricing can be used to maximize deductions and minimize global effective tax rates. • For COVID-19 and CARES ACT

Some possible new strategies could include:

• For FDII and GILTI

» Determine whether IP is better located in the U.S. or abroad, including the costs of unwinding current structures and implementing new structures.

• For GILTI

» Maximize the exempt-deemed tangible income returns on CFCs to minimize GILTI. » Manage FTC. » Manage Previously Taxed Income (“PTI”) distributions. » Consider non-CFC entities to house business operations, since GILTI only applies to CFCs.

• For BEAT

» Review mark-ups on payments to foreign related parties.

marcumllp.com | 51