In November 2020, the US Tax Court released its opinion in
Coca-Cola v Commissioner. If the Tax Court decision is upheld on appeal, it will join the Internal Revenue Service (IRS) victory in
Altera Corp. v Commissioner as a rare win for the government in a transfer pricing (TP) case. The Tax Court upheld $9.8 billion in TP adjustments, while giving Coca-Cola credit – over the IRS’s objection – to $1.8 billion in dividend offsets.
Coca-Cola’s foreign operations were structured through supply points, which manufactured soft drink concentrate, and service companies or ServCos, which performed marketing functions. Concentrate manufactured by the supply points was turned into finished beverages by unrelated bottlers. A portion of the ServCos’ marketing costs were borne by the supply points, and Coca-Cola took the position that the supply points owned valuable foreign marketing intangibles.
The US Tax Court released its opinion on the deductibility of expenses in
Adams Challenge (UK) Ltd v. Commissioner on January 21 2021. The IRS victory in this case has important consequences for foreign corporations with US operations that may be unsure whether they have a US trade or business and effectively connected income. Such taxpayers should file protective Forms 1120-F to ensure that they are entitled to claim deductions in the event the IRS asserts they have a US trade or business and effectively connected income.
Background
Adams Challenge involved a UK company that chartered a vessel to an operator decommissioning oil and gas wells on the US outer continental shelf. Because the company did not realise these activities constituted a US trade or business with effectively connected income, it did not file US tax returns for two of the years at issue, 2009–10, until 2017, after the IRS had already prepared substitutes for returns (SFRs) for the company.
Janet Yellen, US Secretary of the Treasury
Yellen was voted-in unanimously by the US Senate Finance Committee to replace Steven Mnuchin, who suspended OECD-led talks with other countries on the two-pillar digital tax approach in June 2020. Corporate confidence is high on Yellen restarting negotiations after she stressed that efficient taxation of multinational companies was a priority.
“Working in the context of the OECD negotiations on global taxation, we have much greater leverage to keep our American firms competitive if we avoid a race to the bottom in corporate taxation more globally,” said Yellen at the US Senate on January 19, showing her support for pillar two regarding a global minimum tax.
MAP is an integral component of the international tax system
On November 18, the OECD released a public consultation document concerning BEPS Action 14, which aims to make treaty-based dispute resolution mechanisms more effective. The consultation document contains a number of proposals that, if adopted, would improve dispute resolution and eliminate some longstanding issues.
In 2015, the Inclusive Framework on BEPS committed to adhere to an Action 14 minimum standard. The minimum standard is meant to ensure that taxpayers can access the mutual agreement procedure (MAP) under treaties, and that MAP cases are resolved in a timely and effective manner. The Inclusive Framework also endorsed several optional best practices related to MAP.
Telescoping involves making adjustments pertaining to earlier years in a later year
On October 28, the IRS’s Advance Pricing and Mutual Agreement programme (APMA), a US competent authority office that handles advance pricing agreement (APA) and mutual agreement procedure (MAP) cases, announced policy changes that will make it harder for taxpayers to telescope adjustments in multi-year MAP cases.
Telescoping involves making adjustments pertaining to earlier years in a later year. Historically, APMA has generally been amenable to requests for telescoping, which can eliminate the need for potentially burdensome amended returns for multiple years while generally producing the same overall tax effect. However, the adoption of the Tax Cuts and Jobs Act (TCJA) in late 2017 introduced obstacles to effective telescoping, both by reducing the US corporate income tax rate and by introducing a host of new provisions, such as § 965 repatriation and the global intangible low-taxed income (G