Eaton Corp.'s Transfer Pricing Trial Begins August 24

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The U.S. Tax Court’s transfer pricing trial of Eaton Corp. v. Comm’r1 will begin on August 24, 2015, despite attempts by the I.R.S. to further delay the trial until 2016. The controversy between the parties began in 2011, when the I.R.S. used its discretionary power to cancel its advance pricing agreements2 with Eaton Corp. and issued a notice of deficiency. Eaton Corp. filed a petition in 2012 challenging the I.R.S. cancellations and claiming that the agreements should be upheld on the basis of contract principles. The outcome of the trial could have a substantial impact on the I.R.S. Advance Pricing Agreement Program and impact the finality of these agreements with other taxpayers.

The trial was originally scheduled to begin August 5, but the I.R.S. filed a motion to delay the trial for five months. In response to the motion, Judge Kathleen Kerrigan ordered a 19-day continuance. The I.R.S. filed another motion to reconsider the five-month delay, which Judge Kerrigan denied. The I.R.S. argued that Eaton Corp. has failed to cooperate during the discovery process and that it requires additional time to prepare for trial in light of new developments. Judge Kerrigan denied a further delay of the trial because she doubts that the hostile relationship between the parties will improve with additional time.

Ten Year Throwback

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Two years ago, a U.S. Senate investigation accused Ireland of granting Apple Inc. special tax treatment. This accusation sparked a seemingly never-ending investigation into the state aid granted by certain European countries to specific multinational companies. More recently, Apple, Starbucks, Fiat, and various other companies exposed in the “Luxembourg Leaks” scandal were accused of having paid substandard taxes as a result of agreements between those companies and the Netherlands, Luxembourg, and Ireland, which constituted illegal state aid.

Now, the European Commission (the “Commission”) is looking into the penalties that should be levied upon the income earned through these agreements. The Commission’s investigations into these advance rulings and advance pricing agreements (“A.P.A.’s”) between E.U. member-states and major U.S. multinationals could lead to tax adjustments dating as far back as ten years.

STATE AID

State aid is defined as “an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities.” This does not include subsidies or tax breaks available to all entities. A measure of state aid constitutes an intervention by a state, or through state resources, that gives specific companies or industry sectors an advantage on a selective basis, thereby distorting competition and affecting trade between E.U. member states.

Transfer Pricing Implications of the B.E.P.S. Action Plan

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Determined to eliminate so-called “double non-taxation,” as well as no or low taxation, associated with practices that are perceived to segregate taxable income from the activities that generate them, the Group of Twenty (“G20”) and the Organisation for Economic Co-operation and Development (“O.E.C.D.”) released their Action Plan on Base Erosion and Profit Shifting (“B.E.P.S. Action Plan”) in 2013. Included in the B.E.P.S. Action Plan are several provisions related to transfer pricing:

• Action 4: Limit base erosion via interest deductions and other financial payments;
• Action 8: Assure that transfer pricing outcomes are in line with value creation – Intangibles;
• Action 9: Assure that transfer pricing outcomes are in line with value creation – Risks and capital;
• Action 10: Assure that transfer pricing outcomes are in line with value creation – Other high-risk transactions; and
• Action 13: Re-examine transfer pricing documentation.

The O.E.C.D. has since delivered a number of reports and recommendations related to these actions, including revisions to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“Transfer Pricing Guidelines”), and it continues to perform additional work on deliverables scheduled for later this year.

J.C.T. Report on Competitiveness – A Step Toward Consideration of New Rules

volume 2 no 4   /   Read article

By Stanley C. Ruchelman

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. Stanley C. Ruchelman leads with comments on the J.C.T. analysis of Subchapter N of today’s Code – the foreign provisions.  See more →

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Major U.S. Drug Company Avoids Billions in Taxes on $1,000 Pill

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Gilead Sciences Inc. (“Gilead”) has developed one of the most expensive drugs available and is avoiding billions of dollars in U.S. taxes by holding its profits outside of the U.S.

The U.S. company has produced a hepatitis C treatment that costs $1,000 per pill. The treatment, which consists of a 12-week regime of its hit drug, Sovaldi, and another pill called Harvoni, costs $94,500 and has alleviated the hepatitis infection and successfully cured most patients of hepatitis C. Since receiving approval for Sovaldi from the Food and Drug Administration in 2013, the profits poured in for Gilead.