4.60.7 Guidelines for Evaluating International Referrals

Manual Transmittal

October 15, 2019

Purpose

(1) This transmits revised IRM 4.60.7, International Procedures, Guidelines for Evaluating International Referrals.

Material Changes

(1) Rewrote IRM 4.60.7 to conform to new requirement to include internal control information at the beginning of the IRM (subsection 4.60.7.1).

(2) This transmittal has been updated to reflect organizational changes.

(3) Updated to reflect changes made by the Tax Cuts and Jobs Act (TCJA) (P.L.115-97) as follows:

  • Added new subsection IRM 4.60.7.2.3 Global Intangible Low Taxed Income (GILTI).

  • Added new subsection IRM 4.60.7.2.4 Base Erosion and Anti-Abuse Tax (BEAT).

  • Modified subsection in IRM 4.60.7.2.1 to provide additional guidance on income shifting.

Effect on Other Documents

This IRM supersedes IRM 4.60.7, dated December 17, 2015.

Audience

Large Business & International (LB&I), Small Business and Self Employed (SB/SE), Tax Exempt and Government Entities (TE/GE) management, examiners and specialists.

Effective Date

(10-15-2019)

John E. Hinding
Director, Cross Border Activities (CBA)
Large Business and International Division

Program Scope and Objectives

  1. Purpose: This section outlines examination guidance for international referral recipients (IRRs) in the evaluation of international referrals for acceptance or rejection.

  2. Audience: The primary users of this IRM are LB&I, SB/SE and TE/GE managers, examiners and specialists.

  3. Policy Owner: The CBA Director develops policies concerning the CBA Practice Area.

  4. Program Owner: The CBA Practice Network manages and administers technical policy matters.

  5. Primary Stakeholders: IRS managers , examiners and specialists in LB&I, SB/SE and TE/GE.

Authority

  1. See IRM 4.46.1.1.2, LB&I Examination Process, General Information and Definitions, Authority.

Responsibilities

  1. The IRRs are responsible for following the guidance provided in this IRM when evaluating international referrals.

Program Management and Review

  1. The effectiveness of the subject matter presented in this IRM section is dependent upon the monitoring of tax law developments, the technical expertise of the subject matter experts who have responsibility for authoring this section, and obtaining feedback from the field on best practices for audit techniques. To that end, the controls developed to monitor this IRM and program include periodic updates to this section as mandated by LB&I’s Internal Management Documents (IMD) program, making updates to the section in response to tax law changes, asking a team of subject matter experts from the practice networks and exam function to review existing language, asking experts to draft updates to the section, and allowing impacted stakeholders to review and comment on the section through the document clearance process.

  2. Statistics from the SRS may be compiled and used by management for workload planning purposes.

Terms/Definitions/Acronyms

  1. The following table contains commonly used acronyms.

    Acronym Description
    BEAT Base Erosion and Anti-Abuse Tax
    CBA Cross Border Activities
    CFC Controlled Foreign Corporation
    ETI Extra-Territorial Income
    FDII Foreign Derived Intangible Income
    GILTI Global Intangible Low-Taxed Income
    IMD Internal Management Documents
    IRM Internal Revenue Manual
    IRR International Referral Recipient
    LB&I Large Business & International
    QBAI Qualified Business Asset Investment
    R&D Research & Development
    SB/SE Small Business and Self Employed
    SRS Specialist Referral System
    TCJA Tax Cuts and Jobs Act
    TE/GE Tax Exempt and Government Entities

Related Resources

  1. See IRM 4.46.3, Planning the Examination, for procedures regarding issue selection, team member selection, and the SRS.

  2. Examiners access the SRS to input international referrals. The SRS can be found at this link: https://srs.web.irs.gov/default.aspx.

  3. See IRM 4.61.3, Developing IRC 482 Cases, for procedures regarding adding transfer pricing specialists.

Evaluation Procedures

  1. The IRR will consider the following when evaluating international referrals:

    • Whether the taxpayer has a branch, or owns a subsidiary, or a controlling interest in any other entity that is located in a low or no tax jurisdiction.

      Note:

      Determination of the low or no tax jurisdiction should be made and provided by the SRS submitter. Determination should also be made and provided by the submitter if an abusive tax shelter or a listed transaction is present. Particular care should be exercised in evaluating a referral since there may be greater incentive for the improper shifting of income to a low or no tax jurisdiction.

    • For income shifting transactions, see IRM 4.60.7.4.

    • The impact of allocation of income and expenses between U.S. companies and their affiliates in Puerto Rico.

    • Whether a significant amount of foreign tax credit claimed.

      Note:

      Consider the taxpayer’s method of allocating and apportioning income and expenses for purposes of computing foreign tax credit.

    • Whether the taxpayer had any significant foreign activity or losses related to its foreign investments.

    • Whether the taxpayer claimed a significant amount of ETI excluded from gross income on Form 8873, Extraterritorial Income Exclusion.

      Note:

      Although ETI was repealed in 2004, there are transitional rules where Form 8873 may still be filed for grandfathered transaction.

    • Whether the taxpayer should be subject to penalties for failing to furnish the information required under IRC 6038(a) (Form 5471 penalties), IRC 6038A (25-percent foreign owned domestic corporations) and IRC 6038C (foreign corporations engaged in a U.S., trade or business).

      Note:

      The examiner should identify Form(s) 5471 and 5472 that are blank, incomplete, or state "information available on request."

    • Whether the taxpayer filed a Form 1042 and whether there are material issues regarding withholding at source.

    • Significant deduction claimed on Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).

  2. The IRR will also review the taxpayer’s information to determine whether additional information should be requested and to assess whether any disclosures were not made or required forms were not filed.

Income Shifting

  1. The IRR will consider whether an opportunity exists for the improper shifting of income from entities subject to U.S. income taxes to related foreign entities. Such shifting of income may have arisen from, but is not limited to, the following situations between a domestic entity and a controlled or controlling foreign entity:

    • Cost sharing arrangements

    • Purchases or sales of stock in trade or depreciable property

    • Compensation paid or received for technical, managerial, engineering, construction, scientific or other services

    • Commissions, rents, and royalties received or paid

    • Constructive dividends received from a foreign corporation

    • Amounts borrowed from a controlled foreign corporation (excluding ordinary trade accounts that are settled timely)

    • Premiums paid or received for insurance or reinsurance

    • Sale, exchange, assignment or capital contribution of intangible property by a taxpayer to a related foreign entity

    • Transactions under IRC 269, IRC 367, or IRC 482

Subpart F Income

  1. The IRR will consider the following when evaluating subpart F income:

    • Whether the taxpayer has reported any subpart F income.

    • Whether the activities of the CFC may generate subpart F income.

    • Whether the foreign tax credits materially reduce the taxpayer’s liability on reporting subpart F income.

    • Whether distributions received that are excluded from gross income are previously taxed earnings and profits income.

    • Whether the proper amount of gain recognized under IRC 1248 was determined correctly.

Global Intangible Low-Taxed Income (GILTI)

  1. The IRR will consider the following when evaluating the GILTI inclusion:

    • Whether the taxpayer reported any GILTI inclusion.

    • Whether the taxpayer properly filed Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI).

    • Whether the taxpayer properly computed net CFC tested income in computing the GILTI inclusion.

    • Whether the taxpayer properly determined the deemed tangible income return which includes properly determining the taxpayer's QBAI and specified interest expense.

    • Whether the taxpayer properly allocated the GILTI inclusion back to its CFCs.

    • If the taxpayer claimed a foreign tax credit for taxes deemed paid on the GILTI inclusion, whether the taxpayer calculated it correctly.

Base Erosion and Anti-Abuse Tax (BEAT)

  1. )The IRR will consider the following when evaluating BEAT:

    • Whether the taxpayer reported any Base Erosion Minimum Tax Amount on Form 1120, Form 1120-F, Form 1120-PC, Form 1120-L, or Form 1120-C.

    • Whether the taxpayer properly filed Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts.

    • Whether the taxpayer properly applied the gross receipts and base erosion tests at the aggregate group level: 1) whether the taxpayer has average annual gross receipts for the 3-taxable-year period ending with the preceding tax year of at least $500 million; and 2) whether the taxpayer has a base erosion percentage of 3% or higher (2% or higher for a bank or registered securities dealer).

    • Whether the taxpayer made base erosion payments to foreign related parties and properly reported these payments on Form 8991, Form 5471, Form 5472, and/or Form 8858.

    • Whether the taxpayer properly computed its Modified Taxable Income, Regular Tax Liability, and Base Erosion Minimum Tax Amount on Form 8991.