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DewDiligence

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Re: Biopharm investor post# 19810

Wednesday, 08/02/2006 1:27:47 AM

Wednesday, August 02, 2006 1:27:47 AM

Post# of 252776
IRS, Treasury Propose Tightening
Tax Rules for Multinational Firms

[This change could be a big (negative) deal for Big Pharma and such midsized companies as FRX and GILD. It’s astonishing that the rules governing these issues have not been changed in almost 40 years.]

http://online.wsj.com/article/SB115448422311124220.html

>>
By ROBERT GUY MATTHEWS
August 2, 2006

WASHINGTON -- Multinational companies operating in the U.S. will likely face stricter tax-compliance rules and bigger tax bites as a result of proposed changes designed to close loopholes that for decades have allowed the companies to shift tax liabilities into lower-tax jurisdictions.

The Internal Revenue Service and the Treasury Department yesterday issued proposed regulations revamping how companies account for the transfer of services and intellectual property to their affiliates in and outside of the U.S. The rules are likely to take effect Jan. 1.

With increased globalization, companies routinely transfer intellectual property, profit-making patents, legal services and payroll functions, for example, to related affiliates. Companies do that to lower their costs and share information and services that eliminate the need for duplicate operations and thus increase profits.

But tax authorities have struggled with how to assess a tax on services and know-how that ultimately lead to higher profits at related affiliates. Currently, if a company makes a product in the U.S. and then ships it to its foreign operations to be sold, the profit from the product comes back to the U.S. headquarters and can be taxed accordingly.

That process is murkier when a company develops intellectual property, or even a patent, and ships that information to a related foreign company. If the foreign affiliate tweaks the idea making it more valuable, tax authorities have been trying to figure out how much of the profit should be attributed to the U.S. company so it can be taxed.

Determining the tax liability has been a tedious process that often pits country against country and leaves multinationals bewildered, said Sean Kevelighan, spokesman for economic and tax policy for the Treasury Department.

The proposed rules, while not exhaustive, attempt to simplify and stop companies from classifying the profits from intellectual property to the country with the mildest tax bite. The proposal also aims to clarify how companies classified certain taxable income from their affiliates.

The regulations would spell out various scenarios, such as accounting, auditing and staffing, that the IRS would automatically accept so the company wouldn't have to show the tax income breakdown. The regulations also spell out the aspects of business -- research and development, construction and exploration of natural resources, for which a company would have to detail the effect on the parent company's profits.

The IRS regulations hadn't been changed since 1968.
<<

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