IRS Enforcement of Outbound Toll Charge

Your Guide to State, Local, Federal, Estate + International Taxation

The IRS is warning its examiners of a new area of interest to look out for when examining corporate taxpayers. On November 2, 2015, the IRS released an International Practice Area (IPU), which provides examiners instruction on how to audit U.S. corporate taxpayers who may try to get around the Internal Revenue Code Section 367(d) “toll charge”. The toll charge is a tax charged on transfers of intangible property out of the United States to other foreign countries.

Under Code Section 367(d), transfers of certain outbound intangible property are taxed as if they were sold at that time. However, the recent IPU issued specifically states that the transfers under Code Section 367(d) do not apply to goodwill or going concern. As such, taxpayers may attempt to categorize certain outbound transfers as goodwill or going concern in order to avoid taxation. The IRS has recognized many U.S. taxpayers have used such transfers as tax saving schemes, in which high value intangible property is transferred to related parties in countries that have lower tax rates. Thus, the IRS has provided instructions in the IPU to thoroughly analyze and determine whether any goodwill or going concern has been properly valued and whether any additional intangible assets have been transferred and not reported. The IPU specifically states that “the issue often becomes whether foreign goodwill or going concern even exists, and if so, the proper value of it. In fact, in some cases, the goodwill may be domestic, rather than foreign.”

Taxpayers should consult a qualified tax adviser regarding any outbound transfers of intangible property to be sure they are in compliance with the IRS rules and regulations.

By Jill A. Helm, CPA