IRS Issues Guidance on Transfer Pricing Adjustments in Section 936 Exit Audits
Pharma and Life Sciences tax news: Vol. 8, No.4
On August 19, 2009, the IRS Large and Midsize Business Division ("LMSB") issued additional guidance to its agents on examining transfer pricing and other adjustments arising as a result of taxpayers transferring their operations from former Section 936 possessions corporations to controlled foreign corporations ("CFCs"). As a result of the 2005 expiration of the possessions tax credit, most companies that had operated under Section 936 (which significantly includes those companies in the pharmaceutical and other healthcare industries), transferred the operations of those corporations to CFCs sometime between 1999 and 2006. Conversion transactions typically involved: (1) the transfer of physical assets located in Puerto Rico to the CFC under section 351, (2) a license or other migration of intangible property to the CFC, and (3) a non-recognition transfer to the CFC of "foreign goodwill and going concern value" in a transaction intended to be exempt from the rules of section 367(d). These exit strategies are a Tier I examination issue and this guidance addresses potential adjustments, considerations and information sought as part of the IRS' Information Document Requests ("IDR") related to Section 482 and Puerto Rico tax implications.
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