Transfers of Intangible Property: Revise §§ 482 and 936(h) to Tax Transfers of Business Functions

Georgia State University Law Review, Aug 2016

By William McDonald, Published on 08/22/16

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Transfers of Intangible Property: Revise §§ 482 and 936(h) to Tax Transfers of Business Functions

Transfers of Intangible Property: Revise §§ 482 and 936(h) to Tax Transfers of Business Functions William McDonald 0 1 0 Georgia State University College of Law , USA 1 Thi s Article is brought to you for free and open access by the Publications at Reading Room. It has been accepted for inclusion in Georgia State University Law Review by an authorized editor of Reading Room. For more information , please , USA - Article 6 TRANSFERS OF INTANGIBLE PROPERTY: REVISE §§ 482 AND 936(H) TO TAX TRANSFERS OF BUSINESS FUNCTIONS William C. McDonald INTRODUCTION Home-grown establishments like Burger King, Inc. are moving operations overseas in large part because of the international corporate tax system in the United States.1 Like a conscientious objector fleeing across the border to our neighbors to the North, Burger King’s merger with the Canadian-based Tim Horton’s could mean that the company will move its headquarters from Florida to Canada to take advantage of lower corporate taxes.2 Companies like Burger King use transfer pricing to shift income from higher tax countries to lower tax countries and obtain huge tax savings from doing so.3 Even though a company like Google operates in mostly high-tax jurisdictions with corporate tax rates topping 20%, carefully planned transfer pricing strategies allow Google to enjoy an effective tax rate of merely 2.4%.4 978 GEORGIA STATE UNIVERSITY LAW REVIEW [Vol. 32:4 In addition to changing tax residency in the context of a corporate inversion, moving income-producing assets and intangible property from a high-tax jurisdiction to a low-tax jurisdiction has the added advantage of reducing taxes going forward.5 Section 482 of the U.S. IRS Tax Code (the Code) requires an arm’s length consideration for transfers of tangible and intangible property between related parties.6 To the extent that the company does not transfer its income producing intangibles (like the trademark, brand name, etc . . . ) from the United States to Canada, moving the corporate headquarters taken by itself would, without additional steps, generally not reduce the corporation’s United States tax bill.7 5. See H.R. Rep. No. 99-426, at 423 (1985). There is a strong incentive for taxpayers to transfer intangibles to related foreign corporations or possessions corporations in a low tax jurisdiction, particularly when the intangible has a high value relative to manufacturing or assembly costs. Such transfers can result in indefinite tax deferral or effective tax exemption on the earnings, while retaining the value of the earnings in the related group. Id. 6. I.R.C. § 482 (2012) (“In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)( 3 )(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.”). Treasury regulation § 1.482-1(b)( 1 ) further provides: In determining the true taxable income of a controlled taxpayer, the standard to be applied in every case is that of a taxpayer dealing at arm’s length with an uncontrolled taxpayer. A controlled transaction meets the arm’s length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm’s length result). Treas. Reg. § 1.482-4(b)( 1 ) (as amended in 2011); see also Treas. Reg. § 1.482-4(a) (as amended in 2011) (requiring an “arm’s length amount charged in a controlled transfer of intangible property”); ALLISON CHRISTIANS ET AL., UNITED STATES INTERNATIONAL TAXATION 304 (2d ed. 2011) (“Known as the ‘arm’s length’ standard, the idea is to achieve parity between controlled and uncontrolled taxpayers. In the United States, this is done by recasting for tax purposes the results of non-arm’s-length transactions between controlled persons to reflect more accurately the ‘true’ taxable income derived by the related parties from the property or transaction.”). 7. Compare I.R.C. § 482 (2012), with Treas. Reg. § 1.482-4(b)( 1 )–(6) (as amended in 2011) (workforce-in-place does not constitute an intangible). To this extent, if a company’s management constitutes merely a “workforce,” then the Commissioner may not adjust revenue to account for the value of the transferred “intangible” because no intangible within the meaning of the statute was transferred. Compare I.R.C. § 482 (2012) (“[T]he Secretary may distribute, apportion, or allocate gross income, deductions credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent the evasion of taxes . . . .”), with Treas. Reg. § 1.482-4(b)( 1 )–(6) (as amended in 2011) (defining an intangible for the purposes of Section 482). 2016] 979 Every company adjusts its operations based on market changes or market changes that it seeks (...truncated)


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William McDonald. Transfers of Intangible Property: Revise §§ 482 and 936(h) to Tax Transfers of Business Functions, Georgia State University Law Review, 2016, Volume 32, Issue 4,