International Taxation:

IRS' Administration of Tax-Customs Valuation Rules in Tax Code Section 1059A

GGD-94-61: Published: Feb 4, 1994. Publicly Released: Mar 7, 1994.

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Pursuant to a congressional request, GAO provided information on the Internal Revenue Service's (IRS) enforcement of section 1059A of the Internal Revenue Code (IRC), focusing on: (1) specific cases in which IRS used section 1059A to govern transfer prices; (2) the applicability of section 1059A to certain transactions between U.S. and Mexican affiliates; (3) the impact on U.S. revenues of allowing U.S. taxpayers to make payments on behalf of their foreign-related parties; and (4) legislative proposals to reconcile IRS and the Customs Service's valuation rules.

GAO found that: (1) IRS has included section 1059A issues in nine tax audits since 1986; (2) the July 1992 IRS technical advice memorandum stated that IRC section 1059A could not be used to prevent a U.S. taxpayer from including certain expenses in the taxpayer's cost for tax purposes; (3) although U.S. parent companies pay certain expenses on behalf of their foreign-related parties, these expenses are not subject to customs duties because they are not included in duty valuation; (4) U.S and Mexican federal tax revenues decrease 2 percent and the parent and related companies' combined net income increases 3 percent when U.S. taxpayers pay related parties' expenses; (5) it could not estimate the total tax revenue losses attributable to U.S. parent companies paying related parties' expenses because of the few cases audited and the unknown extent of the practice in countries other than Mexico; (6) IRS has ceased implementation of section 1059A in situations involving direct payments on behalf of foreign-related parties since it issued its technical advice memorandum; (7) the inconsistency in IRS and Customs' valuation definitions can be resolved by a multilateral renegotiation of the Customs Valuation Code of the General Agreement on Tariffs and Trade (GATT) or a unilateral congressional amendment of either IRC section 1059A or section 402 of the customs legislation; (8) IRS believes that the issue should be resolved by amending customs law; and (9) Customs and private sector representatives believe that the two legislative options will violate GATT and lead to retaliation by other GATT members.

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