Schedule UTP and Transfer Pricing

1. Schedule UTP and Transfer Pricing NABE Roundtable June 24, 2010 Kate Sullivan

2. Schedule Uncertain Tax Position (“UTP”): Overview • Who must file a Schedule UTP? • Filers of 1120, 1120L, 1120PC, and 1120F; • With assets greater than or equal to $10 million; • That issued an audited financial statement covering all or part of the corporation’s (or its related parties’) operations for all or part of the tax year; and • That have one or more reportable tax positions. • When does the UTP apply? • Generally for tax positions taken in a taxable year beginning after 12/15/2009. • Transition relief: No reporting for tax positions taken in a taxable year beginning before 12/15/09, or on or after that date but ending before 1/1/2010. • Note that taxpayers will have to report positions taken in subsequent taxable years, even if those positions relate to transactions or structures put in place in these earlier years.

3. Schedule UTP: Overview (cont.) • What must a company report on the Schedule UTP? • Reserved tax positions (i.e., those positions, per unit of account, would cause an adjustment to a line item on a tax return if not sustained) as determined under FIN 48 or other applicable international standards; and • Any position for which a tax reserve has not been recorded because either: • The taxpayer expects to litigate the position and the IRS would be less than 50% likely to settle the issue and the taxpayer has a greater than 50% chance of prevailing, or • Based on administrative practices and precedents of the IRS, the IRS has a practice of not challenging the position in Exam. • How does a taxpayer complete the Schedule UTP? • Taxpayer must include a concise description of each UTP. Description must include: • Statement that the position involves an item of income, gain, loss, deduction or credit; • Statement whether the position involves a determination of the value of any property or right or a computation of basis; and • The rationale for the position and the reasons for determining the position is uncertain. • “Sufficient detail” must be provided so the IRS can determine the nature of the uncertainty.

4. Schedule UTP: Overview (cont.) • How does a taxpayer complete the Schedule UTP? (cont.) • Generally, the taxpayer must report the maximum amount of the potential federal tax liability attributable to each UTP determined on an annual basis (i.e., the Maximum Tax Adjustment or “MTA”). • Transfer Pricing and Valuation Exception: • MTA not required for transfer pricing and valuation. • Taxpayers must rank these tax positions based on either: • The amount recorded as a reserve in the tax return; or • The estimated tax adjustment if the tax position were not sustained. • The form includes a schedule for the current tax year, the prior tax years, and the “concise descriptions.”

5. Schedule UTP: Implications & Taxpayer Concerns • IRS has stated that the purpose of the Schedule UTP is to achieve increased compliance with more efficient use of resources. • This information is important for the IRS for understanding tax positions and assessing how they affect taxpayer tax liability. • Helpful for focusing resources. • Allows Exam teams to identify all issues more quickly and efficiently. • Potential for increased cost, burden, and exposure for taxpayers. • Taxpayer burden intended to be mitigated because of work done for FIN 48. • Likely to alter the way taxpayers and auditors interact. • Likely to alter how taxpayers and the IRS interact. • “Policy of Restraint” intended to be preserved.

6. Thank you and contact information Kate Sullivan Ceteris Salem, MA Direct:    978-666-4657 kate.sullivan@ceterisgroup.com