IRS Highlights Non-Compliance of Midmarket Firms
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
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.
Richter LLP, Toronto