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
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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
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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]
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Every company adjusts its operations based on market changes or
market changes that it seeks (...truncated)