The Internal Revenue Service (IRS) Large Business and International (LB&I) division has launched the ‘captive services provider campaign’, aimed at ensuring US multinationals are paying captive service providers no more than arm’s length prices.
It will be lead by Jennifer Best, director of treaty and transfer pricing operations, and John Hughes, director of advanced pricing and mutual agreement.
The IRS referenced that section 482 regulations and the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines provide rules for determining arm’s length pricing for transactions between controlled entities.
These transactions include those in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group.
According to the IRS, the arm’s length price is determined “by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary”.
The IRS noted: “Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the US tax base.”
Therefore, the campaign’s goal is to ensure “that US multinational companies are paying their captive service providers no more than arm’s length prices”.
The campaign is one of a trio, alongside the ‘offshore private banking campaign’ and ‘loose filed forms 5471’, engineered to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.
The campaigns were identified through LB&I data analysis and suggestions from IRS employees.
Last week, the IRS claimed another victory against micro captives in the US Tax Court.