Yesterday, the Obama Administration released the details of the FY 2010 budget, including its tax proposals (see Treasury Department’s General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals otherwise know as the Green Book). In my earlier postings, I wondered whether they would take on the issue of transfer pricing and intangibles.
Well, they did — page 32 of the Green Book reads as follows:
LIMIT SHIFTING OF INCOME THROUGH INTANGIBLE PROPERTY TRANSFERS
Section 482 permits the Commissioner to distribute, apportion, or allocate gross income, deductions, credits, and other allowances between or among two or more organizations, trades, or businesses under common ownership or control whenever “necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.” Section 482 also provides that in the case of any transfer (or license) of intangible property (as defined in section 936(h)(3)(B)), the income with respect to such transfer or license must be commensurate with the income attributable to the intangible property. Further, under section 367(d), if a U.S. person transfers intangible property (as defined in section 936(h)(3)(B)) to a foreign corporation in certain nonrecognition transactions, the U.S. person is treated as selling the intangible property for a series of payments contingent on the productivity, use, or disposition of the property that are commensurate with the transferee’s income from the property. The payments generally continue annually over the useful life of the property.
Reasons for Change
Controversy often arises concerning the value of intangible property transferred between related persons. Further, the scope of the intangible property subject to sections 482 and 367(d) is not entirely clear or consistent. This lack of clarity and consistency may result in the inappropriate avoidance of U.S. tax and misuse of the rules applicable to transfers of intangible property to foreign persons.
To prevent inappropriate shifting of income outside the United States, the proposal would clarify the definition of intangible property for purposes of sections 367(d) and 482 to include workforce in place, goodwill and going concern value. The proposal would also clarify that in a transfer of multiple intangible properties, the Commissioner may value the intangible properties on an aggregate basis where that achieves a more reliable result. The proposal would also clarify that intangible property must be valued at its highest and best use, as it would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
The proposal would be effective for taxable years beginning after December 31, 2010.
This proposal is relatively small change in the overall plan. Treasury estimates it raises $548 million between 2010 and 2014 and $2.9 billion over 10 years (2010-2019). In contrast, the two big changes to international taxation, reforming business entity classification rules for foreign entities and defering deduction of expenses tied to defered income, raise $86.5 billion and $60 billion respectively.
Those two provisions have already drawn strong opposition, as the Wall Street Journal notes:
“The proposed tax increases on U.S. companies by the Treasury threaten the jobs of tens of millions of U.S. workers and our future economic growth,” said John Castellani, president of the Business Roundtable. “Adopting these changes will hamstring American competitiveness.”
It is unclear how strong the opposition will be to the intangible provisions.
UPDATE: for an overview of the coming fight on this issue, see Politico’s story today How Business will wage war on Obama tax plan.