Originally published in Canadian Tax Focus, Volume 7, Number 3, August 2017.
In March 2017, the IRS's Large Business and International Division rolled out 13 campaigns that Canadian midmarket business owners should be made aware of. Specifically, the IRS will target the midmarket segment on the basis of its perceived substantial compliance risk. Three of the 13 campaigns are of particular relevance.
- Related-party transactions campaign: This campaign will affect many Canadian companies with US affiliates. Previously, the focus in the United States was on larger MNEs—the "big fish" in the market. This campaign highlights a redefined focus on the midmarket segment to ensure compliance with US transfer-pricing rules (IRC section 482). Issue-based examinations are planned.
- Inbound distributor campaign: This campaign will have a significant impact on Canadian entities that export their goods into the United States to be distributed by their US affiliates. The issue is whether the US corporations are earning adequate returns on the basis of assets, the risks assumed, and the functions performed. Companies need to ensure that their transfer-pricing methodologies are in line with US regulations. This campaign seems to match the related-party transactions campaign in the types of issues addressed; it appears that the IRS believes that transfer-pricing transgressions are a common occurrence in this sector.
- Form 1120-F non-filer campaign: Many Canadian companies have established a US presence in order to operate in and expand into the US market. A Canadian company with a US branch or a PE has a federal and/or state obligation to file form 1120-F ("U.S. Income Tax Return of a Foreign Corporation"). However, the IRS says it has data suggesting that many companies are not meeting their filing obligations. The IRS will use external data sources to identify these foreign companies. As step 1, the IRS will use a "soft letter outreach" to encourage appropriate action. If companies do not take appropriate action, the IRS will examine the situation further to determine the correct tax liability. However, there is no suggestion of any amnesty, so it is to be expected that penalties and interest will be due on any such filing.
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