Law360 Talks to Clark Armitage, Peter Barnes, and Elizabeth Stevens on International Tax Cases to Watch in 2018

International tax specialists will keep their eyes on key cases in the coming year, including battles over tech giants’ dealings with tax-friendly Ireland and disputes that have put major multinationals’ transfer pricing methods — and the IRS’ rule-making authority — on the line.

Here, Law360 highlights the international tax cases worth watching in 2018.

IRS Defends Cost-Sharing Rule Nixed by Tax Court

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As Clark Armitage of Caplin & Drysdale, in Washington put it, the Tax Court’s reference to the Xilinx ruling — which the Ninth Circuit ultimately upheld — was a reminder to the IRS that in the past, the court told the agency that requiring stock-based compensation to be compensated was not an arm’s-length requirement.

“Nothing’s changed factually. It’s still a non-arm’s-length requirement,” Armitage said. “That seems like something the Ninth Circuit would be receptive to.”

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Round 2 of Medtronic’s Transfer Pricing Fight

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Elizabeth Stevens of Caplin & Drysdale, in Washington, said practitioners had observed that the Tax Court seems to be skeptical of profit-based methods and tends to lean in favor of CUT.

“If the Eighth Circuit were to push back on that, that might be a signal to the Tax Court [...] in future cases to approach the best method analysis a little differently,” Stevens said.

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Coca-Cola Challenges Its $3.3 Billion Tax Bill

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Peter Barnes, a senior fellow at Duke University School of Law and a former tax executive with General Electric Co., said that Coca-Cola’s case is important to other major multinationals because it raises the question of whether consistent application of a particular transfer pricing method protects the taxpayer, or rather, suggests that the taxpayer has failed to adjust its transfer pricing as business methods and global competition change over a long period of time. [Mr. Barnes is also Of Counsel to Caplin & Drysdale’s International Tax Group.]

“And what does the IRS need to show in order to challenge a long-standing transfer pricing methodology?” Barnes said.  “How much burden should be on the IRS, and how much burden should be on the taxpayer?”

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Foreign Income Restrictions at Stake in 3M Case

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Armitage said he thinks it’s accepted and agreed that the Brazilian restrictions in 3M’s case didn’t meet the requirements under the IRS’ regulation regarding when it will consider foreign blocked income. 

“So the question is whether that regulation is invalid, because it effectively overturns prior precedent of the [U.S.] Supreme Court and the Fifth Circuit,” Armitage said, citing cases that concluded that the agency can’t ignore foreign income restrictions.

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France Continues Tax Battle Against Google

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France’s litigation and audit activity bear watching because France is the developed country that is most aggressive in attacking multinational technology companies, Barnes said.

At the same time, French companies “invest heavily outside of France, so if France wants to gain more tax as a market country, that result could come back to haunt French multinationals,” Barnes said. “The consequences of France's tax challenges to Google will be significant.”

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Excerpt taken from the article “International Tax Cases To Watch In 2018” by Natalie Olivo for Law360.