Skip to Main Content
 

Law360 Quotes Elizabeth Stevens on COVID-19 Aid and Transfer Pricing

October 22, 2020, Law360 Tax Authority

Multinational companies receiving government funds to help them weather the coronavirus pandemic face some unsettled questions about their transfer pricing — including how amounts that are supposed to remain in the country providing the aid should be treated.

. . .

Elizabeth Stevens, a member of Caplin & Drysdale, gave the example of a Canadian company that in normal times would pay $100 to its U.S. affiliate, but whose operations have been hurt by the pandemic. Without government aid, the Canadian company could afford to pay only $50, but it receives $50 in support.

"Should it only pay $50 notwithstanding that that's not an arm's-length amount?" Stevens asked. Doing so, she said, could run counter to the U.S. transfer pricing rules on blocked income.

. . .

The U.S. regulations are "extremely strict" about when foreign rules can prevent a reallocation of income, Stevens said. A key provision is that for the IRS to respect a foreign restriction, it must apply to transactions between unrelated parties as well as to those between related parties, she said.

. . .

Stevens cited an example from Tansy Jefferies, a principal at RSM US LLP, who described a captive intercompany insurance provider that receives a government subsidy compensating it for 50% of its cost base.

"Should the principal still remunerate that entity based on 100% of its costs plus a markup? Fifty percent of its costs plus a markup? Fifty percent of its costs plus a markup on all the costs?" Stevens asked. "Are we supposed to put it in where it would have been but for the government aid, or should we ignore the government aid on account of the payment?"

The calculation becomes even more difficult when the markup is variable. If the arm's-length range is between 5% and 15%, and the tested party — the entity whose profits are measured in the transfer pricing analysis — falls somewhere within that, it's unclear whether the cost was actually passed through, Stevens said.

"If governments want to impose these kinds of restrictions, it behooves them to be very specific about what they mean so that taxpayers don't have uncertainty about compliance," she said.

To view the full article, please visit Law360's website (subscription required).

________________________________________________

About Caplin & Drysdale
Celebrating our 55th Anniversary in 2019, Caplin & Drysdale continues to be a leading provider of legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations.

The firm's reputation over the years has earned us the trust and respect of clients, industry peers, and government agencies. Moreover, clients rely on our broad knowledge of the law and our keen insights into their business concerns and personal interests. Our lawyers' strong tactical and problem-solving skills -- combined with substantial experience handling a variety of complex, high stakes, matters in a boutique environment -- make us one the nation's most distinctive law firms.

With offices in New York City and Washington, D.C., Caplin & Drysdale's core practice areas include:
For more information, please visit us at www.caplindrysdale.com.
Washington, DC Office:
One Thomas Circle NW
Suite 1100
Washington, DC 20005
202.862.5000
New York, NY Office:
600 Lexington Avenue
21st Floor
New York, NY 10022
212.379.6000

___________________________

Disclaimer
This communication does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.

Attorney Advertising
It is possible that under the laws, rules, or regulations of certain jurisdictions, this may be construed as an advertisement or solicitation.
©2020 Caplin & Drysdale, Chartered
All Rights Reserved.

Related Professionals

Related Practice Area(s)