United States

IRS settles transfer pricing claim for a reduced amount

IRS settlement indicates support for approach in Medtronic case

TAX ALERT  | 

In a stipulated settlement filed July 20, 2016, Boston Scientific Corp. and the IRS announced terms of an agreement regarding disputes for tax years 2001 through 2007, reducing the transfer pricing adjustments from a proposed $3.5 billion to $975 million. Boston Scientific indicated it would make payments of $275 million to resolve the transfer pricing issues, a significant decrease from the IRS’s originally asserted $1.2 billion tax liability (plus penalties and interest). This settlement is significant for taxpayers because it shows that the IRS is willing to accept the precedent set by the Tax Court in Medtronic v. Commissioner, a recent case with similar facts, where the court ruled in favor of the taxpayer.

The Boston Scientific settlement arrives just days before the dispute was set for trial and (more notably) just days after the Tax Court ruled in Medtronic. At issue in the Medtronic case were transactions between entities in the United States and Puerto Rico with regards to the manufacture and distribution of medical devices. Similarly, the Boston Scientific case involved the manufacture and distribution of medical devices and focused on transactions between entities in the United States and subsidiaries in Puerto Rico and Ireland. In the Medtronic case, the Tax Court rejected the transfer pricing method applied by the IRS and adopted the taxpayer’s method with some adjustments, arriving at royalty rates of 22 percent and 44 percent, depending on the type of medical device. In the Boston Scientific settlement, the parties agreed to similar royalty rates, i.e., between 21.7 percent and 38.6 percent, depending on the type of medical device.

While there is no formal indication the results of the Medtronic case influenced the settlement stipulated between Boston Scientific and the IRS, the similarities of the cases are noteworthy. The outcomes of both cases seem to favor the taxpayers, and certainly provide support for the application of similar transfer pricing methods in similar cases. Whether the outcomes are indicative of future IRS actions remains to be seen.

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