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  • Service: Tax
  • Date: 6/25/2014

June 2014 

Welcome to the June 2014 edition of our quarterly Global Tax Disputes Update, bringing you the latest news in tax controversy around the world.

With tax audit and dispute activity rising in almost every country, keeping up with trends and developments is more important than ever. In this edition, you’ll find briefings on key news, events and thought leadership submitted by Global Tax Dispute Resolution & Controversy professionals in KPMG member firms worldwide. Staying informed can be a crucial first line of defense as you manage your disputes around the globe.


Make sure to view our past issues of Global Tax Disputes Update.


Focus on tax dispute resolution and controversy



Focus on transfer pricing dispute resolution




Tax Dispute and Controversy Update – Alternative Dispute Resolution


As the revenue authorities around the world refocus their efforts on adjustments and enforcement, they are similarly focused on gaining efficiency in the face of reduced budgets and increasing responsibility. One approach to achieving this efficiency in the tax disputes resolution process is the use of alternative dispute resolution (ADR) methods, to avoid costly, time-consuming and resource-depleting litigation. ADR provides an approach to resolution in which the taxpayer and the revenue authority come together to actively seek resolution. While different jurisdictions have different offerings and approaches, the concept is gaining global appeal.


On a recent webcast, KPMG dispute resolution professionals from Australia, the UK, the US and Germany shared their experiences with ADR and discussed the various options available in their country.


View the presentation and webcast replay.


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Focus on top audit issues – selected countries part 1


Levels of tax audits and disputes continue to rise in countries worldwide. In some cases, taxpayers face similar audit issues, such as those arising for global companies as the international movement to address base erosion and profit shifting (BEPS) continues to gather steam. In other cases, domestic issues and priorities are creating audit issues that are unique to the jurisdiction.


A recent article from KPMG’s Global Tax Disputes and Controversy practice presents a high level round-up of some of the top audit issues being experienced by clients of KPMG International member firms in Canada, China, India, the US and the UK. (Part 2 of this article – coming soon – will profile the top audit issues in the emerging MINT countries – Mexico, Indonesia, Nigeria and Turkey.)


Read the article.


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OECD – head of BEPS project discusses goals and issues


In a recent interview, Raffaele Russo, head of the BEPS (Base Erosion and Profit Shifting) project of the Organization for Economic Co-operation and Development (OECD) discusses the OECD's goals and the difficulties with implementation.


According to Russo, the BEPS project is not just about harmful tax avoidance. The project originated in part out of a concern that efforts to relieve double taxation would not survive for long with so many opportunities for double non-taxation. To tackle double taxation, the OECD and G-20 also had to work on a set of rules to attack systemic double non-taxation. Addressing double non-taxation has received widespread support from governments and outside interest groups.


Russo's biggest concerns with BEPS are the compressed time frame and keeping the business community's attention. The challenge is to coordinate all the different items, many of which are being worked on simultaneously.


Implementation will be the biggest challenge. Writing rules and recommendations is the easier part of the project. It is daunting to marshal a set of guidelines and rules into a functioning multilateral system when that implementation requires numerous governments to make changes to domestic laws and adopt policies that may not be in their own country's best interests. However, some recent changes in the tax and banking worlds give reason to be optimistic.


Further information:

Sharon Katz-Pearlman


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OECD – stakeholders disagree on country-by-country reporting


At the Organization for Economic Co-operation and Development's public transfer pricing documentation consultation in Paris on 19 May 2014, representatives from governments, the business sector, and civil society engaged in a heated debate over the method of filing and sharing corporate information through a country-by-country reporting template.


Some stakeholders advocated for direct filing with all countries, while others pushed for a treaty-based sharing system. A common argument for treaty-based information sharing is that highly confidential information, such as sales, taxes paid, and pre-tax income, is usually held at the parent-company level, and subsidiaries may access only information that concerns them and their subsidiaries. A direct filing system would offer access to confidential information and would affect corporate governance of global companies. Another concern is that some countries do not subject authorities to tax confidentiality statutes.


Concerns were also raised that treaty-based sharing system would put developing countries at a disadvantage because many of them have weak or non-existent treaty networks


Further information:

Sharon Katz-Pearlman


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OECD – some tax authorities already seek country-by-country tax information


As the OECD considers a proposal for country-by-country reporting (see article above), tax authorities are already beginning to request similar information through taxpayer audits, according to practitioners. In particular, tax authorities are seeking more transparency into the global operations of taxpayers in order to assess the ‘full value chain’ of an organization. Tax authorities in Finland, France and Sweden, for example, are taking an interest in how the reported profits in the local jurisdiction compare with the profits reported and functions undertaken in other jurisdictions.


Not only are more countries seeking information on global profit levels, but many are not waiting for the conclusions of the base erosion and profit-shifting project to enact new measures. Countries have begun adopting changes even though one of the OECD’s objectives for the BEPS project was to discourage uncoordinated action. For example, changes have already been made independently in Mexico, France, Germany, Australia and Austria.


Further information:

Sharon Katz-Pearlman


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OECD – discussion drafts for neutralizing hybrid mismatch arrangements


On 19 March 2014, the OECD released two discussion drafts pursuant to Action 2 (Neutralize the Effects of Hybrid Mismatch Arrangements) of the Base Erosion and Profit Shifting Action Plan. The first discussion draft addresses recommendations for OECD members’ domestic laws. The second discussion draft addresses proposed tax treaty changes.


Read the article.


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Australia – ATO focuses on non-resident transactions


Non-resident taxpayers need to consider the tax implications of proposed transactions with an Australian connection and how to manage the interaction with the Australian Taxation Office (ATO). The Foreign Investment Review Board and the ATO are reportedly sharing information, resulting in the ATO seeking active engagement with taxpayers during the course of a transaction.


It is important for taxpayers to determine the optimal way to manage this interaction to help ensure the smooth conduct of their transaction and avoid the potential for the ATO to use its formal powers to protect the revenue.


Read the article.


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Australia – what is the potential impact of country-by-country reporting?


Australian taxpayers are already subject to extensive transfer pricing recordkeeping rules, following last year’s passage of Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013. Australian taxpayers are also subject to significant disclosure requirements—such as the ”International Dealings Schedule“ which may need to be filed with the annual income tax return.


Given these requirements, KPMG in Australia analyzed the additional impact of country-by-country reporting as proposed in an initial draft template of the OECD.


Read the article.


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Brazil – Auditor-General issues opinion on withholding tax and treaty country residents


Since Brazil’s COSIT Interpretive Declaratory Act 001 was published in January 2000, Brazilian tax authorities have understood that remittances to another country deriving from technical assistance or technical services, without technology transfer, are subject to withholding tax (WHT), even to countries which Brazil has tax treaties.


Recently, the government of Finland announced its intention to file a denunciation against the agreement entered into by both countries to avoid double taxation. As a result, the Brazilian Federal Revenue Department (RFB) acknowledged the need to review the COSIT Interpretive Declaratory Act and requested the opinion of the Office of the Attorney-General of the National Treasury (PGFN) on the matter.


The PGFN issued an opinion (Opinion 2363/2013) that remittances to another country deriving from contracts regarding the rendering of technical assistance or technical services, without technology transfer, fall within Article 7 (Companies Profit) of the Organization for Economic Co-operation and Development (OECD) Model Convention, instead of Articles 21 or 22 (Income not Expressly Described). Therefore, such amounts should only be taxed in the country of residence of the foreign company and should no longer be subject to WHT.


This understanding, however, is limited to some treaties. Opinion 2363/2013 says:


… the aforementioned conclusion does not apply to cases in which the company performs its activity through a permanent establishment located in Brazil, nor to the occasions in which, as a result of negotiations held between the signatory countries, there is express provision in the agreements authorizing taxation in Brazil. I.e., in the latter case, in the circumstances in which the international agreements or protocol provision authorize the taxation in Brazil, as in the case of treaties and protocols which characterize the amounts paid as royalties, such services may be submitted to the treatment established in Article 12 of the Model Convention (Royalties), irrespective of the nature of the service rendered (principal or accessory nature), Article 7 not being applicable.


The PGFN’s opinion is not yet legally binding to all tax authorities. However, administrative rulings requests and refund claims will be analyzed according to the new understanding.


Further information:

Marcos Matsunaga


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Brazil – interest on overdue taxes under São Paulo’s tax amnesty program


The State of São Paulo calculates interest on overdue taxes at a rate based on a daily percentage, which may reach the total of 3.6 percent per month. However, the Brazilian Supreme Court (STF) has decided that the states and the federal district cannot set monetary restatement indexes greater than those set by the federal government for the same purpose – the SELIC rate (RE No. 183.907- 4/SP and ADI No. 442).


In addition, the Special Chamber of the Court of Justice of the State of São Paulo, acknowledged that the interest rate shall be equal to or smaller than the rate applied by the federal government for the same purpose (Action against Unconstitutionality No. 0170909-61.2012.8.26.0000, judged on 27 February 2013).


Nevertheless, State Decree number 58.811/12, which established the State Tax Debts Amnesty Program, determined that interest on debt should be calculated using rate fixed by the State Law number 13.918/2009, which exceed the SELIC rate.


After analyzing cases regarding the State Tax Debts Amnesty Program, the Court of Justice of the State of São Paulo ruled the recalculation of tax debts under the São Paulo’s Amnesty Program, excluding the default interest under State Law number 13.918/2009 and applying the SELIC rate.


Recently, new State Law number 15.387/2014 reopened the State Tax Debts Amnesty Program, keeping the same provision regarding interest rate. Based on the decisions cited above, taxpayers have good precedents to challenge charges by São Paulo State, even under the amnesty program.


Further information:

Marcos Matsunaga


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Brazil – new guidance on WHT, capital gains and foreign currencies


Brazil’s Federal Revenue Service published Normative Instruction 1,455/2014 (IN 1,455) on 7 March 2014, setting the applicable rules regarding withholding income tax (WHT) on remittances to legal entities located abroad. Among other guidance, IN 1,455 regulates how non-residents should calculate taxable capital gains, which are essentially defined as the positive difference between an assets’ (or shares’) acquisition cost in Brazilian real (BRL) and its sale price in BRL.


According to this guidance, the acquisition cost of equity interest in foreign currency should be converted into BRL at the exchange rate in force on the date of acquisition of an investment that will be transferred, such as the disposal value in foreign currency should be converted into BRL. In this case, the exchange rate variation between foreign currency and BRL could result in a positive difference and thus a capital gain, even though there is no positive difference in foreign currency.


For example, for an investment acquired at a value of 100 US dollars (USD) and disposed at USD100, there is no positive difference. However, in the case of Brazilian currency devaluation (USD 1 = BRL 2 on acquisition and USD1 = BRL 3 on disposal), there is positive difference and capital gain in BRL. In other words, the new guidance could result in significantly more tax payable.


Where companies do not observe the methodology under the IN 1,455 and a positive difference in BRL arises between acquisition and disposal values on the eventual change of shareholders, KPMG in Mexico believes WHT would probably be assessed. However, there are good grounds to argue that the capital gain on an investment originally made in foreign currency by a non-resident should result from a positive difference of the acquisition cost and the disposal price in the foreign currency.


Further information:

Marcos Matsunaga


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Canada – appeal court narrows scope of foreign affiliate anti-avoidance rule


Canada’s Federal Court of Appeal (FCA) unanimously upheld the Tax Court of Canada's (TCC) decision in the taxpayer's favor in The Queen v. Lehigh Cement Limited et al. (2014 FCA 103). The FCA agreed that the foreign affiliate (FA) anti-avoidance rule should not deny a deduction for exempt surplus dividends that a Canadian corporation received from its U.S. affiliate through a tax-efficient financing structure.


However, the FCA significantly narrowed the scope of the FA anti-avoidance rule from the TCC's determination, concluding that the rule is targeted at taxpayers whose principal purpose of acquiring or disposing of the shares of a non-resident corporation is to manipulate its FA, controlled FA or related corporation status.


Read the article.


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Czech Republic – reporting requirements for cash pooling transactions


Certain cash pooling transactions are subject to a reporting requirement of the Czech National Bank (CNB). If these transactions are not reported to the CNB, relatively severe penalties may be imposed.


Read the article.


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France – court rejects ‘free capital’ re-assessments of branch banks


In April 2014, the French high court (Conseil d’Etat) issued several decisions affirming the judgments of a lower court of appeals that re-assessments made with respect to French branches of foreign banks, based on a ’deemed‘ thin capitalization standard, were not supported by law.


The high court held that banks (like any other company) are free to choose how they fund their business (i.e. by debt or equity).


Read the article

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Hungary – EU Court of Justice considers whether group taxation is discriminatory


The Court of Justice of the European Union recently considered whether Hungarian tax law—that serves to disadvantage undertakings linked, within a taxpayer group, to companies established in another EU Member State—constitutes an indirect discrimination on the basis of the location of the registered offices of the companies.


Read the article.


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India – signs its first set of advance pricing agreements


India’s advance pricing agreements (APA) program, introduced as a method of proactive dispute resolution, became operational on 1 July 2012. Although the program was seen as a positive step toward curbing the unprecedented litigation that was affecting investor sentiment, taxpayers were apprehensive of the practical challenges associated with APA negotiations.


Amid the prevailing uncertainty, Indian taxpayers filed over 140 APA applications in 2013, with KPMG in India handling over 40 of them. India has now signed its first batch of APAs with five multinational corporations, fixing their tax liability in cross-border transactions over the APA term.


The APA program is important for providing certainty to taxpayers. Generally, an APA is valid for up to 5 years and can be renewed, revised or cancelled in some circumstances. During the 5-year period, the taxpayer is required to file an annual report to confirm compliance with the terms of the APA. The tax authorities shall conduct a limited audit of the taxpayer to ensure compliance with the APA’s terms.


Further information:

Mayur Desai


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India – revenue authorities increasingly challenge deductibility of management fees


International companies in India generally have affiliates in the form of limited companies. Lately, the Indian Revenue authorities (IRA) have been challenging the tax deductibility of headquarters cross-charges (e.g. management service fees charged by the global company to its Indian affiliate).


The IRA is asking for information such as:


  • the need for these services
  • whether the services were indeed provided
  • demonstration of the benefits that are derived to the payer from the services

Where the Indian affiliate (i.e. payer) cannot provide this information to the IRA’s satisfaction, the IRA may disallow the expenditure to the Indian affiliates (separately from transfer pricing audits wherein the arm’s length price of the cross-charge is determined by the transfer pricing officer). However, this risk may be mitigated by maintaining robust documentation.


Further information:

Nilesh Modi


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India – no adjustments for corporate guarantee, alleged notional interest


The Delhi bench of the Income-tax Appellate Tribunal held that a corporate guarantee issued by the taxpayer for the benefit of its related entities (and that did not involve any costs or have any bearing on profits) was not an ‘international transaction’ for purposes of India’s transfer pricing rules.


Read the article.


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India – tribunal rejects mended return filed in advance of transfer pricing adjustment


The Mumbai bench of the Income-tax Appellate Tribunal upheld the imposition of a 100-percent penalty under section 271(1)(c) of the Income Tax Act.


The tribunal determined that the taxpayer filed the amended (revised) return after the return had been referred to the Transfer Pricing Officer and only in anticipation of a transfer pricing adjustment. Thus the tribunal held that the amended return was not ’voluntarily‘ filed. (Deloitte Consulting India Pvt. Ltd. v. ACIT) (ITA Nos. 7650 and 7651/Mum/2013)


Read the article.

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Mexico – Supreme Court rejects pro-rata expense limitations


Mexico’s Supreme Court declared unconstitutional a provision of the Mexican Income Tax Law, in force until December 31, 2013, that prohibits the deduction of "pro-rata expenses incurred abroad with whom are not taxpayers of income tax". This declaration of unconstitutionality is not absolute. The resolution itself requires the taxpayer to meet certain conditions to qualify for the deduction and indicates that the tax authority must verify whether such requirements are met before rejecting this type of expenses.


Read the article.

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Netherlands – Dutch taxpayer liable for Swiss captive subsidiary’s profits


A January 2014 decision of the Dutch district court of Zeeland/West-Brabant concerned a Swiss captive-insurance company (without employees), taxing most of its profits back in the hands of a related Dutch taxpayer and imposing 50 percent penalties. No appeal was filed, and the decision is now final.


Read the article.


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Oman – Tax Department focuses on finalizing tax assessments


The Oman Tax Department plans to complete tax assessments for tax years up to and including the 2012 tax year. Oman’s full tax assessment system gives the Tax Department five years (from the end of the tax year in which the tax return was submitted) to make their enquiries. Given this extended enquiry window, companies usually have several open tax years, and the Tax Department often raises enquiries regarding multiple tax years at the same time and typically allowing taxpayers only 30 days to respond.


KPMG in Oman has seen a significant number of enquiry letters, covering as many as four open tax years, up to the 2012 taxation year. The letters generally give the taxpayer only 30 days to respond and, based on discussions with the Tax Department, the aim is to finalize assessments by the end of July 2014.


Read the article.

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Poland – anti-avoidance provisions in pending legislation


In March 2014, Poland’s cabinet approved changes that aim to streamline tax proceedings and improve the tax collection process. Among these changes, the most important include:


  • general anti-avoidance provisions
  • general power-of-attorney rules for tax proceedings
  • digitization of audit reporting documentation
  • streamlining of the individual interpretation system.

Read the article (PDF 146 KB).


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Poland – draft legislative changes to APA program


Poland’s Council of Ministers in March 2014 approved guidelines with respect to draft legislative proposals to amend the advance pricing agreement (APA) program. Among other changes, the proposals would expand the availability of APAs, which are currently limited to one type of transaction entered into between two parties only. In particular, an APA could apply to cost sharing agreements among members of multinational groups.


Read the article.


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Portugal – transfer pricing law changes allow more unilateral APAs


Changes to Portugal’s corporate income tax law, enacted for 2014, included amendments to the transfer pricing rules. Among other things, the new rules allow for unilateral advance pricing agreements (APA) regardless of the existence of an income tax treaty between Portugal and the home country of the related counterparty. Previously, unilateral APAs would only be considered where such a treaty was in place.


Read the article.


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Singapore – finding of tax avoidance arrangement upheld on appeal


Singapore’s Court of Appeal affirmed a decision of the High Court, finding that the taxpayer had undertaken a tax avoidance arrangement, but that the Comptroller had acted ultra vires in trying to use additional assessments as a means to claw back previously paid tax refunds.


At issue was whether section 33 of the Singapore income tax law applied to the taxpayer’s financing arrangement. Because the taxpayer had no bona fide commercial justification, a further issue was whether it was appropriate for the taxpayer to have taken into account certain franked dividend income and interest expenses in its tax return and thus whether the taxpayer was entitled to tax refunds.


Read the article.


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Slovakia – new guidance on transfer pricing methods


The Slovak Financial Directorate issued a ‘methodical guideline’ concerning transfer pricing methods. Among other things, the guidance describes in detail the transfer pricing methods that are based comparing prices (e.g., traditional transaction method) and methods based on comparing profits (e.g., transactional profit method). The transfer pricing method selected and used must be proved to the tax authorities and the transfer pricing documentation must set out the taxpayer’s reasoning for choosing a particular transfer pricing method was chosen.


Read the article.


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United Kingdom – HRMC officials share views on alternative dispute resolution


KPMG in the UK recently hosted an event for Alternative Dispute Resolution Practice (ADR) practitioners from accounting, law and commercial firms together with senior HM Revenue and Customs (HMRC) people including: Gill Aitken, HMRC General Counsel and Solicitor, Iain McNeill, Head of Large Business Risk, and Val Hennelly, Head of Dispute Resolution.


Kevin Elliott, who leads KPMG in the UK’s ADR practice, summarizes the main issues discussed by each of these officials:


Gill Aitken, General Counsel and Solicitor


Gill recently took on the role as HMRC’s General Counsel and Solicitor and is a member of the ADR Panel. Gill described her role as a guardian of cases accepted into the ADR program. She views ADR as beneficial to HMRC and taxpayers but believes the benefits will be lost if inappropriate cases are accepted.


Gill also noted that a number of people in HMRC’s Solicitors’ Office have undertaken mediation training with the Centre for Effective Dispute Resolution (CEDR). While these people are not intended to take part ADR meetings, it is beneficial to have CEDR-trained individuals in the Solicitors Office to inform decisions on which cases HMRC should litigate.


Iain McNeill, Head of Large Business Risk


Iain is a member of the ADR Panel and is also involved in disputes governance. He chairs the Large Case Management Board and is a member of the Enforcement and Compliance Dispute Resolution Board and Transfer Pricing Board.


Iain confirmed that HMRC’s Large Business Directorate, established to deal with the 2,000 largest UK businesses, should not affect the ability of these businesses to have their cases accepted into ADR. Where cases are rejected, HMRC will determine whether there are other ways of supporting Customer Relationship Managers (CRM) to help resolve disputes.


Any application for ADR is notified to the relevant Deputy Director (DD). The DDs expect their CRMs to work hard in applying dispute resolution techniques in their own cases, with the DDs providing support when appropriate. The DDs are held to account through hard targets for resolving disputes in their regions. The standard target is to resolve enquiries within 18 months. The target is achieved in 85 percent of cases. The remainder are listed for review at financial year-end and prioritized for resolution in the following year.


Val Hennelly Head of Dispute Resolution Unit


Val is a member of the ADR Panel and is responsible for running the ADR program. Val confirmed that the number of cases going into ADR is increasing and the quality of applications is improving due to better understanding of what cases are appropriate. The general consensus is that HMRC are looking to expand the situations in which ADR can be applied.


Further information:

Kevin Elliot


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United States – appeals rules aim to clarify jurisdictional issues


Before the end of 2014, the Internal Revenue Service (IRS) Appeals Office is expected to clarify its procedures for sending cases back to the Compliance function when new facts come to light. The IRS is also expected to lengthen the minimum amount of time required on the statute of limitations for cases coming to Appeals to 365 days (from 180 days).


Although Appeals will send a case back to Compliance any time the taxpayer produces new information, different rules will apply when a taxpayer overseen by the IRS Large Business and International (LB&I) Division raises new arguments. In this situation, the case will remain in Appeals' jurisdiction but Appeals will give LB&I an opportunity to review and comment on the new argument. Similar rules will apply in Small Business/Self-Employed Division field cases.


Further information:

Sharon Katz-Pearlman


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United States – guidance on applying tax principles to virtual currency transactions


The IRS has issued guidance in the form of frequently asked questions (FAQ) on the application of existing general tax principles to transactions using virtual currency, explaining that virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes. The IRS has also said that virtual currency such as Bitcoin is property for federal income tax purposes, bringing clarity to a murky area that some have worried could enable tax avoidance.


Read the FAQ (42 KB).


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United States – KPMG webcast replay examines IRS’ Transfer Pricing Audit Roadmap


On 14 February 2014, the Internal Revenue Service (IRS) Transfer Pricing Operations team released the Transfer Pricing Audit Road Map, new guidance to assist IRS examiners with their transfer pricing examinations. The road map provides examiners with a practical approach to the identification of transfer pricing issues and the development of those issues that merit a full review.


On a recent webcast, senior professionals were joined by Samuel Maruca, IRS director, Transfer Pricing Operations, Large Business & International Division, for a discussion of the road map, its key concepts and its application to transfer pricing examinations. Speakers also discussed the three phases of the transfer pricing exam, the enhanced role of the taxpayer in the process, and the IRS’ view of how transfer pricing examinations should be developed.


View the webcast replay.


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United States – IRS files supplement in Eaton transfer pricing case


The Internal Revenue Service (IRS) filed a supplement to its motion to amend an order in the Tax Court that included a detailed statement of facts and grounds for why the IRS cancelled the advanced pricing agreements at issue in Eaton Corp. et al. v. Commissioner. The taxpayer is seeking a redetermination of deficiencies and penalties that resulted from transfer pricing adjustments by the IRS.


Further information:

Sharon Katz-Pearlman


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United States – IRS releases Competent Authority statistics for 2012-13


The Internal Revenue Service has released its competent authority statistics for the 15-month period from 1 October 2012, through 31 December 2013, for its Advance Pricing and Mutual Agreement Program and the Treaty Assistance and Interpretation Team.


Read the article.


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United States – IRS updates FAQ on general FATCA issues


The Internal Revenue Service (IRS) has updated its list of frequently asked questions (FAQ) on general issues associated with the Foreign Account Tax Compliance Act (FATCA) requirements, adding new questions and answers on the registration process and on responsible officer topics.


Read the FAQ.


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United States – Tax Court orders production of opinion letters after privilege waived


The US Tax Court held that two partnerships must produce attorney opinion letters on tax shelter transactions if the partnerships persist in good-faith affirmative defenses to accuracy-related penalties, finding that they forfeited the attorney-client privilege by putting the partnerships' state of mind and beliefs into issue.


Read the Tax Court’s opinion (PDF 78 KB).


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