United States

Transfer pricing adjustment did not limit tax holiday for repatriation


On Nov. 22, 2016, the U.S. Tax Court issued an opinion allowing a company to claim full benefits of a now-expired tax holiday for offshore earnings.

In Analog Devices, Inc. v. Commissioner, the issue before the court was whether an intercompany accounts receivable, established by the taxpayer under special IRS rules governing transfer pricing adjustments, constituted ‘related party indebtedness’ under former section 965. Notwithstanding the IRS’ stated position that such accounts receivable constitute related party indebtedness, the court sided with the taxpayer largely because the taxpayer’s closing agreement failed to specifically treat the accounts receivable as related party indebtedness. In addition, the court held that even if such accounts receivable were treated as debt, they did not arise until the effective date of the closing agreement, which was long after the year in which the taxpayer received the dividend distribution from its foreign subsidiary. Under the tax holiday provision, the taxpayer’s benefit could have been reduced if related party indebtedness existed during the year of the distribution. However, the court concluded that the execution of the closing agreement in connection with the IRS’ transfer pricing adjustments did not operate to retroactively create related party indebtedness for the year of the distribution.

The Analog decision is a reminder that it is critical for taxpayers entering into agreements with the IRS to specifically address all relevant matters and not assume that specific matters can or will be addressed by boilerplate language in the agreement. To the contrary, the court in the Analog case stated that it would give very little weight to boilerplate provisions because they did not result from specific direct negotiations by the parties. Neglecting to address matters clearly and directly may result in adverse consequences later. Accordingly, taxpayers seeking specific tax results in a closing agreement should articulate their position not only with regard to the matters subject to the specific controversy, but also should set forth their understanding as to any collateral consequences flowing from resolution of the primary matters in dispute.


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