International Taxation

For each year from 1987 through 1990, about 72 percent of foreign-controlled corporations paid no U.S. income tax, compared to about 59 percent of U.S.-controlled corporations. The Internal Revenue Service (IRS) in 1992 proposed section 482 adjustments of at least $1 billion for foreign-controlled corporations and at least $3.1 billion for U.S.-controlled corporations. As of September 1992, taxpayers had protested at least $14.4 billion of proposed section 482 adjustments. IRS' recent experience with section 482 cases has been difficult. In 1992 IRS' Appeals Division sustained only 24 percent of the dollar amount of section 482 adjustments proposed by IRS examiners. In addition, IRS lost a significant section 482 issue for each of the five corporations that had a major section 482 case litigated and ruled on by a court between 1990 and 1992. The challenges of section 482 cases will remain for at least two reasons. First, the growing influence of international forces on the U.S. economy will increase the potential for underpayment of U.S. taxes through transfer pricing by multinational corporations. Second, although the new, temporary transfer pricing regulations have many promising features, they still require taxpayers and IRS examiners to collect great amounts of information and use considerable subjective judgment to compute arm's length prices.