Pharma and Life Sciences Tax News - Vol 7, No. 4
The IRS Large and Mid-Size Business (LMSB) division has published a supplement to its February 2007 industry directive on Section 936 (possession corporations) exit strategies, which has been designated as a Tier I issue. This directive was issued by Sergio Arellano, who replaced John Risacher, as the Industry Director, Retailers, Food, Pharmaceuticals and Healthcare.
Section 936 exit strategies address the offshore migration of intangibles under Section 367 and the transfer pricing of U.S.-owned intangibles under Section 482 that result from the restructuring of possession corporations. The second directive focuses on the Section 367 issues that arise out of the restructuring of Section 936 corporations. The directive provides an overview of the reporting requirements and operative provisions of Section 367, as well as analytical tools for determining compliance with Section 367.
Numerous pharmaceutical companies owned and operating Section 936 companies to manufacture their products for the US and non US markets. Most of these companies were concerted to CFCs especially once Section 936 expired in 2005. The conversions began in the early 2000s. This IRS is just now starting to audit these conversions and hence the need for guidance for their examiners.
In the directive the IRS, once again, attempts to argue that a "workforce-in-place" is an intangible of the Section 936 company. As such, if it is transferred offshore in the conversion process, it is taxable to the US transferor under Section 367(d) and not eligible to be treated as foreign goodwill. This is a very controversial position of the IRS.
The directive also advises agents to carefully review the documentation on Form 926 reporting the details of the assets transferred with special attention to the business enterprise valuation including the projections.
Link to the directive: http://www.irs.gov/businesses/article/0,,id=179270,00.html
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