The Internal Revenue Service (IRS) has announced that U.S. distribution subsidiaries of foreign multinationals, including Danish companies, can expect special transfer pricing scrutiny during IRS audits. The IRS is concerned that foreign-owned companies are not paying their “fair share” of income tax when a parent company charges excessively high prices on goods, services and royalties. Incorrect cross-border prices can lead to artificially low corporate income tax payments.
Recently, we have seen the IRS become more aggressive in employing this audit strategy, and challenging transfer prices has become a lucrative way to raise tax revenue. During audits, the IRS will request information on the company’s business operations and justification of the cross-border prices charged between companies – commonly known as a transfer pricing documentation report.
In discussions with tax agents, IRS Auditors regularly review earnings before interest and tax (EBIT) as a percentage of net sales when selecting targets. U.S. subsidiaries incurring losses face the highest risk of scrutiny, and many middle-market companies are being audited for the first time.
New Transfer Pricing Standards in DK Raise the Bar and Widen the Net – Starting at $20 Million in Group Revenue!
The IRS is not the only tax authority concerned about transfer pricing. The Danish tax authority, SKAT, has also become more aggressive in auditing transfer pricing practices for Danish companies.
Transfer pricing has long been a tax concern for the largest multinationals and news articles on Apple, Starbucks, Google and others have raised the profile of this contentious tax issue. Danish transfer pricing documentation rules were updated in 2016 to follow the OECD’s recommendations for combating large-scale tax avoidance by multinational companies. Consequently, fines now apply for documentation breaches. SKAT, for the first time in March 2017 published details of a court case in which a fine for failure to comply with transfer pricing documentation rules was upheld.
For the largest companies, new international transfer pricing documentation standards require companies to provide information on both global business operations (a “Master File”) available to all tax authorities and a transfer pricing analysis (a “Local File”) for tax authorities in all countries where a multinational operates. However, many middle market companies will also be subject to these higher documentation standards in Denmark. Most notably, Danish regulations now require companies with global revenues of DKK 125 million (~ $20 million) and more than 250 employees to be subject to the same higher transfer pricing documentation standards as large multinationals.
In our experience, these new requirements are more prescriptive both in terms of the volume of information required and the details that must be included in a report. For instance, a Master File should include written descriptions of important drivers of business profit, the supply chain for the five largest product lines, major service agreements within the group, and an explanation of which companies own intangibles by country. By contrast, a Local File for each country, requires a thorough explanation of local business strategies, functions, risks and assets. Each Local File must also include an explanation of inter-company transactions, financial results and selection of the “Best/Most Appropriate Method” for bench marking transfer prices.
What to Do Next?
Taxpayers of all sizes should review their transfer pricing arrangements in anticipation of a potential audit. Companies with U.S. distribution subsidiaries can expect additional transfer pricing scrutiny as a part of every IRS tax audit. Depending on the risk profile of a company, transfer pricing documentation or other supporting economic analyses may be necessary to justify operating results and reduce the risk of additional tax assessments and penalties.
The IRS has published a Transfer Pricing Audit Roadmap which can be viewed here: https://www.irs.gov/businesses/corporations/transfer-pricing-audit-roadmap-now-available .
This article was written by Hanne Rørholm LeLoup and Alex Martin. Hanne LeLoup is a Partner with Hutchinson and Bloodgood LLP, http://www.hbllp.com/ in San Diego, California. HBLLP is a full-service CPA firm. Hanne grew up in Denmark and assists numerous Danish companies with their American tax issues. Hanne can be reached at email@example.com . Alex Martin is a Transfer Pricing Expert at Clayton & McKervey in Detroit, Michigan, https://claytonmckervey.com/. Alex can be reached at firstname.lastname@example.org .
On April 18, 2017, President Trump signed his latest Executive Order “Buy American and Hire American.” The American Immigration Lawyers Association (AILA) observed that while the announcement reflects the administration’s desire to move toward reforms to the H-1B program, there will be no immediate changes or impacts on H-1Bs. It appears that the agencies are asked to review policies related to all visa programs and recommend changes to root out “fraud and abuse,” and to propose additional reforms so that H-1B visas are awarded to the most skilled or highest-paid applicants.
See the official White House announcement here: https://www.whitehouse.gov/the-press-office/2017/04/18/presidential-executive-order-buy-american-and-hire-american
Starting April 3, 2017, USCIS will temporarily suspend premium processing for all H-1B petitions. This suspension may last up to 6 months. We will notify the public before resuming premium processing for H-1B petitions. While premium processing is suspended, we will reject any Form I-907 filed with an H-1B petition. If the petitioner submits one combined check for both the Form I-907 and Form I-129 H-1B fees, we will have to reject both forms. Read more here: USCIS Will Temporarily Suspend Premium Processing for All H-1B Petitions and here USCIS Newsletter .
Martensen Wright PC was represented by Ebba Josefson at the Tech Forecast 360 event in San Francisco on February 8, 2017. The event was hosted by the Silicon Vikings, http://siliconvikings.com/.
Key note speakers included Scott A. Anderson, Chief Economist at Bank of the West; John Chiang, California State Treasurer; Sean Randolph, Senior Director of the Bay Area Council Economic Institute; Bill Reichert, Managing Director of Garage Technology Ventures; Carl Fritjofsson, Principal at Creandum; Christian Lagerling, Co-Founder & Senior Advisor at GP Bullhound, and Barry Broome, President & CEO of Greater Sacramento Area Economic Council.
The speakers shared their point of view on how the new White House administration will impact the tech economy in the Bay Area and California and Nordic companies seeking to enter the US. Here are some of the highlights:
• Most speakers agreed that the cost of housing and a general housing shortage, especially in the Bay Area, are central issues for the tech economy and the economy of California. In the near future the aim to create affordable housing may be negatively impacted by the new administration’s tax policies. (more…)
Dorthe Mikkelsen Wright and Edward Wright attended The Business of Racing with Champion Ferrari Driver Christina Nielsen. A big thank-you to the Danish Chamber of Commerce Southern California for hosting this exciting event. Christina is the first Danish female driver in the 24-hour Le Mans race and the first female driver to win a professional, full-season Sports Car Championship.
Martensen Wright wishes all our clients, friends and acquaintances a Merry Christmas and a Happy New Year. We thank you for your patronage in 2016 and look forward to being of service to you in 2017.
Our office will reopen Tuesday, Dec. 27 following the Christmas holiday. We know that work continues for many of you; be assured that your matters will receive our prompt attention upon our return on the 27th.
In the meantime, if you are inclined to follow the efforts of another busy soul over the holidays, the North American Aerospace Defense Command (NORAD) tracks Santa’s journey and you can follow along at http://www.noradsanta.org/ or on Twitter @NoradSanta.
Sorry, no Nisse report available at present!
In May 2016, President Obama directed the U.S. Department of Labor to update overtime pay regulations with the publication of The Final Rule, https://www.dol.gov/whd/overtime/final2016/, affecting many U.S. employers and employees. The Final Rule was to take effect on December 1, 2016.
Federal law requires that employers pay overtime wages to all employees unless the employee is considered “exempt” from overtime regulations. The Final Rule increased the minimum annual salary for exempt employees to $47,476. Under the new rule, many employers would be required to either increase the salaries of these employees or change their classification to “non-exempt”, thus making them subject to overtime pay. Many employers therefore took the opportunity to reevaluate the exemption classification of their employees.
Shortly before the Final Rule was to take effect, a federal court temporarily blocked the rule pending further order by the court. https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/what-to-do-now-that-federal-overtime-rule-is-blocked.aspx.
Danish Nationals living in the United States now enjoy the option of having dual citizenship.
This means that Danes can apply to become US citizens via naturalization in the USA without losing their Danish citizenship. The Application for Naturalization, form N-400 is available here: https://www.uscis.gov/n-400
Danes who lost their Danish citizenship when they became citizens of another country prior to September 1, 2015, can apply to have their Danish citizenship reinstated. For more information about Citizenship [in Danish statsborgerskab og indfødsret] please see www.statsforvaltningen.dk and http://www.statsforvaltningen.dk/site.aspx?p=8903 .
The application, Erklæring om Generhvervelse af Dansk Indfødsret for Tidligere Danske Statsborgere, is available here http://www.statsforvaltningen.dk/sfdocs/Andre%20omr%C3%A5der/Indf%C3%B8dsret/20150901/Erkl%C3%A6ringsskema%20-%20dobbelt%20stb%20%C2%A7%203.pdf
Questions about the application should be directed to the State Administration at phone no.: 011 45 72 56 70 00 or via e-mail: email@example.com
The following should be of interest to all our clients with employees in the United States:
USCIS has revised Form I-9, Employment Eligibility Verification. Employers may continue using Form I-9 with a revision date of 03/08/2013 N. through Jan. 21, 2017. By Jan. 22, 2017, employers must use the revised form.
These are some of the changes in the new version:
• Employees only need to provide other last names used in Section 1, rather than all names used.
• The certification in Section 1 for certain foreign nationals takes less time to complete.
• There are additional spaces to enter multiple preparers and translators.
• There is a dedicated area to enter additional information that employers have been required to notate in the margins of the form.
Furthermore, it is now easier than ever to complete Form I-9 on a computer as the revised form includes many upgrades over the old format.
Martensen Wright has learned that the United States Citizenship and Immigration Services (USCIS) will be increasing the filing fees for a number of applications and petitions effective December 23, 2016. Fees paid by the applicants and petitioners fund the USCIS work and fees will be increased by an average of 21 percent.
This may affect some of our immigration clients, especially those that are in the process of preparing applications or might be considering it.
Here is a link to the new fees: https://www.uscis.gov/forms/our-fees
The chart lists USCIS’ fees effective December 23, 2016. Applications and petitions postmarked or filed on or after that date must include these new fees in order for USCIS to process them.