The US Internal Revenue Service (IRS) has set up a new department within the agency, which aims to crack down on corporations that have been moving their profits from country to country in order to lower their tax bills.
According to a report by Reuters on Tuesday, the IRS hired Samuel Maruca, a former corporate lawyer from international law firm Covington & Burling, last May in order to fill the newly created post of Transfer Pricing Director. Since then, Maruca’s key responsibility was to set up a team of specialists that would look into corporations’ transfer pricing policies.
Multinational corporations that practice transfer pricing often move their goods, services, and assets from one international subsidiary to another. These corporations then can effectively manipulate their tax rates by shifting their profits accounting from a high-tax country to a lower-tax one.
"Clearly, the IRS is trying to figure out what to do next on its litigation strategy in these important transfer pricing cases," said Eric Solomon, a director at Ernst & Young, who called Maruca's group a "SWAT team."
"The $64,000 question is, what will be able to do ... and will he really have enough resources to change the game?" added ex-deputy IRS Commissioner Michael Dolan, who is now director of KPMG's Washington national tax practice.
Ever since his appointment, Maruca has been actively looking for specialists from the Big Four accounting firms, as well as other corporate lawyers and consultants, to join his team. Reuters reported that the new department had already filled 40 positions, with the team looking to bring in an additional 60 staffers.
But like most other federal agencies, one of the biggest difficulties facing the IRS has been to keep up with the private sector in attracting the best and most highly trained professionals for the job.
Maruca himself admitted that the agency had “a difficult time attracting and retaining economists” for the team, though new developments in the global market may present “significant external hiring authority” for his department.
"The economic crisis has allowed the IRS to attract talented, experienced industry professionals who might not have been available previously," said Dolan. Changes made by IRS Commissioner Doug Shulman in mid-2010 could also present better opportunities for Maruca’s team, Reuters noted.
Still, whoever joins Maruca’s team should be prepared for the scale of the task facing them. According to Edward Kleinbard, a professor at the University of Southern California and former chief of staff at the Joint Committee on Taxation, the valuation problems when dealing with transfer pricing “are insurmountable."
"There are billion-dollar disputes on just the arms-length transfer pricing of intangibles,” said Kleinbard.
“Anybody who thinks the IRS can ultimately enforce transfer pricing is either an eternal optimist or delusional," added Richard Harvey, a tax professor at Villanova University and a former senior adviser to Shulman.
The staff changes and hiring at IRS "will help them on the margins… But they're still fighting a very difficult battle where the deck is stacked against them,” Harvey said.