The IRS Criminal Investigation (CI) unit’s announcement of a new initiative in August 2017, specifically targeted at using multiple data sources to tackle cross-border tax evasion, is likely to have direct implications for US businesses operating worldwide. Building on the CI unit’s recent experience in offshore evasion, specifically following cases involving UBS and other Swiss banks, this initiative is expected to make intensive use of information and analysis sourced not only from tax data but also obtained under the Foreign Account Tax Compliance Act (FATCA) and other international regulations.
More seriously perhaps, the IRS Large Business and International (LB&I) division has, again in August 2017, announced 13 new campaigns directed at identifying non-compliance and cross-border discrepancies. With these initiatives appearing to reflect a concentrated – and unprecedented – interest in mid-market businesses, the IRS’s stated objective of using FATCA and other data sourced from US-headquartered companies and their subsidiaries worldwide is likely to have major implications for SMEs and ‘micro-multinationals’ trading cross-border.
The 13 initiatives (or ‘Campaigns’) announced by the IRS appear to highlight a new and more stringent focus on the ‘repatriation’ of international profits. Four campaigns, in particular, are likely to have immediate implications for international businesses:
- Related Party Transactions Campaign
- Repatriation Campaign
- Form 1120-F Non-Filer Campaign; and
- Inbound Distributor Campaign.
Related Party Transactions Campaign
Focussed on transactions between ‘commonly controlled entities’ facilitating transfers of funds through entities or shareholders, the IRS’s website makes specifically clear that “LB&I is allocating resources to this issue to determine the level of compliance in related party transactions of taxpayers in the mid-market segment.”
The IRS’s intention to focus on the mid-market is again made clear in this campaign, with the website stating that “LB&I is aware of different repatriation structures being used for purposes of tax free repatriation of funds into the U.S. in the mid-market population. It has also been determined that many of the taxpayers do not properly report repatriations as taxable events on their filed returns. The goal of this campaign is to simultaneously improve issue selection filters while conducting examinations on identified, high risk repatriation issues and thereby increase taxpayer compliance.”
Form 1120-F Non-Filer Campaign
The IRS has identified that many international companies doing business in the USA are not filing the required Form 1120-F. While regulators appear to be taking a softer approach on this campaign, identifying the worst offenders to “encourage them to file their required returns” (initially through “soft letter outreach”), examinations will be undertaken into those companies failing to take appropriate action.
Inbound Distributor Campaign
The IRS also appears to be concerned that inbound distributors in the US are under-reporting profits – where not recording actual losses, and appears to believe these companies to have “incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed”, believing US taxpayers to be “entitled to higher returns in arms-length transactions”. A dedicated training programme for IRS staff is likely to lead to greater scrutiny, as well as more frequent “issue-based examinations”.
Cross-border operations – what should you be doing now?
These initiatives appear to reflect an obvious and growing concern within the IRS that mid-market companies are not repatriating their non-domestic profits as fast or as fully as regulators might like. Increasing concern (particularly over potential under-reporting in inbound distribution arrangements) could mean greater scrutiny of transfer-pricing structures and operations outside of the USA. The IRS clearly intends to make greater use of globally available data, under FATCA and other international agreements. Companies with multiple operations in Europe and worldwide might be well advised to begin a thorough review of arms-length arrangements (and appropriate documentation systems) now.