International Taxation:

Problems Persist in Determining Tax Effects of Intercompany Prices

GGD-92-89: Published: Jun 15, 1992. Publicly Released: Jul 16, 1992.

Additional Materials:


Jennie S. Stathis
(202) 512-5407


Office of Public Affairs
(202) 512-4800

Pursuant to a congressional request, GAO provided information on: (1) whether foreign companies underpay income taxes by improperly using transfer pricing; (2) how the Internal Revenue Service (IRS) determines and recovers such underpaid taxes; and (3) possible alternatives for handling transfer pricing.

GAO found that: (1) foreign-controlled companies often report lower gross profits, net income, and U.S. taxes as percentages of sales than their U.S. counterparts, but those statistics do not prove widespread impropriety; (2) the disparities in profits could result from lower sales prices to increase market share; (3) the tax value of transfer prices that IRS questioned could be significant; (4) IRS difficulties in recovering related taxes included the amount of research necessary to present Section 482 cases, problems in obtaining foreign tax records, staffing and management information limitations, a lack of appellate sustainment of examination findings, and decentralized IRS efforts on transfer pricing problems; and (5) there are various alternative methods for handling transfer pricing, all of which would aim to ease the present case-by-case approach, but each alternative has drawbacks.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS has developed a resource model for allocating staff in the international enforcement area.

    Recommendation: The Commissioner of Internal Revenue should develop an optimal work-load planning and staffing system and continually use it to provide ongoing information at the national level for assessing international staffing needs to best meet the international work load.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS' International Compliance Analysis Division has assembled databases that have allowed it to analyze the extent, nature, and common features of IRS' section 482 findings.

    Recommendation: The Commissioner of Internal Revenue should formally plan, possibly through the new IRS International Compliance Analysis Division, how IRS will put together all of its data to study trends in the types of section 482 findings, in intercompany transactions, and in section 482 case disposition, and how it will act on the trends to improve compliance once they are identified.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: According to an IRS official, in the information area, the program has coordinated people in different districts to track the database success in one district into future success in another. Continuous meetings between the program administration and International Compliance and International Enforcement leaders will include comments on the staffing model that is being developed.

    Recommendation: The Commissioner of Internal Revenue should use the new IRS specialist program to monitor all section 482-related information initiatives being taken, be involved in periodically determining how many IRS staff are needed for section 482 issues, and raise for discussion policies that conflict with an ongoing emphasis on section 482.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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