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Transfer Pricing Issues In Business Restructurings

Business restructurings achieve economic benefits through a broad array of strategies. Cost savings and operational improvements are often key drivers. Therefore, a restructuring exercise may offer significant tax planning opportunities through transfer pricing.

Taxand USA reviews five key transfer pricing areas which should be considered when planning a business restructuring.

Specific US tax regulations affecting intercompany transactions in business restructurings
In the US, specific tax regulations seek to curb the loss of taxable income through redeployment of functions. Transfer pricing regulations under Section 482 prevent the improper shifting of income to foreign corporations when the transfer occurs between entities that are under common ownership or control.

Exit charges for shift of functions
US transfer pricing regulations do not impose a specific exit toll when a function is moved overseas as part of a restructuring exercise. But in practice, the tax authorities views with skepticism strategies that involve the flight of functions, risks or assets.

Workforce-in-place and going-concern as intangibles
Whether workforce-in-place and going-concern are treated as intangible assets for purposes of transfer pricing is significant because if they are, they require compensation on their transfer in the course of a business conversion. In the US, workforce-in-place and going-concern are not specifically listed in the current definition of intangible property under Section 482, but this may change in light of recent developments.

Economic substance doctrine
A business restructuring may be disregarded or recast by the tax authorities if it lacks economic substance. The US economic substance doctrine was codified in the Health Care and Education Reconciliation Act of 2010 that was signed into law on 31 March 2010. This act added new Section 7701(o) and penalty Section 6662(b)(6) to the Internal Revenue Code.

When contractual terms differ from actual behaviour
The IRS is required to respect the terms of a written agreement between controlled persons provided the agreement is consistent with the economic substance of the transactions. If the contractual terms are inconsistent with the economic substance of the underlying transaction, the Service may disregard such contractual terms and impute terms that are consistent with the economic substance of the transaction.

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Your Taxand contact for further queries is:
Enrique MacGregor
T. +1 214 438 1080

Taxand's Take

Tax authorities are engaged in a continual effort to prevent the flight of taxable income from their borders. A business reorganisation whose primary goal is to reduce effective tax rates is unlikely to withstand the tax authorities' scrutiny. On the other hand, a reorganisation plan whose architecture follows a clear business purpose is certain to benefit from significant tax advantages through the adequate application of transfer pricing strategies.

Taxand's Take Author