UTP – Intercompany Charges
Description: Tax deduction at the foreign subsidiary level for charges by Corporate or other affiliates for services, etc.
Affects: Foreign Income Taxes
Prior Exam History: This issue has not been examined by any tax authority
Current Exam Status: Not presently under examination
Unit of Account:
Foreign income tax
Recognition:
This item meets the recognition step. It is it is more likely than not that some foreign tax benefits would be recognized from deductions for intercompany charges if such charges were examined by foreign taxing authorities.
Discussion:
Facts:
Beginning in 2005, The Company corporate charged all business units for substantially all of its expenses. Fox CPA reviewed the amounts being charged to the units and the method of allocation, and concluded the amounts and method were likely not supportable.
Analysis:
The Company believes some amount of charges could be sustained in most jurisdictions. However, the Company realizes that some jurisdictions (e.g., Canada and Korea) have a history of disallowing all intercompany charges if any part is unsupportable. For this reason, the Company calculated the risk of increased foreign taxes under the assumption that all intercompany charges would be disallowed. See attached schedule. The Company believes it has reasonable arguments in each jurisdiction in which there is exposure to avoid interest and penalties.
This analysis does not take into account pre-2005 charges by The Company Holding SA (a Swiss subsidiary) to other European subsidiaries for administrative services. The company believes these charges (which are immaterial in any case) are highly likely to be sustained.
In addition, The Company Technology SA (TCT, a Swiss subsidiary) charged affiliates for services, consisting of server utilization, etc. TCT became somewhat profitable in 2004 and has a positive balance of retained earnings. The Company does not believe TCT has any transfer pricing exposure in Switzerland. Further, the Company believes the charges by TCT would be determined to be arm’s length and allowable by the tax authorities governing the charged affiliates.
The Company notes that any transfer pricing adjustments increasing U.S. taxable income would decrease net operating losses for which a full valuation allowance has been provided. Any adjustments decreasing U.S. taxable income (such as through Competent Authority proceedings) would increase net operating losses for which a full valuation allowance would be provided.
The Company’s French subsidiary has undergone tax audit for years through 2005, and all positions taken on tax returns were accepted. Under FIN 48-1, these settled positions are no longer uncertain tax positions. Therefore, in evaluating tax exposures, French adjustments for years through 2005 have not been considered.
The Company believes that it is unlikely that adjustments in Sweden and Australia would result in more than 50% disallowance of expenses, and has calculated the exposure accordingly. However, the Company believes that adjustments in Korea could result in complete disallowance of intercompany charges.
Measurement:
The total exposure for additional foreign tax on this issue is $353,863.