Worcester Business Journal

www.wbjournal.com March 28, 2016 • Worcester Business Journal 25 A concept that was once just a concern for big business is now becoming a matter for smaller businesses to grapple with as they find it beneficial and easier to expand across borders. Because many foreign jurisdictions have lower tax rates than the 35 percent U.S. corporate income tax rate, there is strong incentive for business groups – cont rol le d t hroug h common ownership – that acquire operations abroad to reduce overall taxes by shifting income to lower tax jurisdictions. Viewed as ripe circumstances for tax manipulation, Congress created Intercompany Transfer Pricing Rules to place related companies on parity with unrelated companies by enforcing an arms-length standard to their pricing transactions with each other. An arms-length transaction exists when a buyer and seller have no relationship to each other and the laws of supply and demand determine the agreed upon price. Without enforcement of an arms-length standard, it would be a natural tendency for a U.S. corporation to undercharge its foreign subsidiary for its inventory, with the result of fewer profits reported in the higher U.S. tax jurisdiction and more profits reported in the foreign subsidiary's lower tax jurisdiction. Recently, the U.S. revamped its enforcement strategy on transfer pricing to ensure that a fair share of multinational business profits are taxed in the U.S. Legislation has focused on international financial activities, and the IRS has directed tremendous resources in reorganizing its international division. The Foreign Tax Compliance Act legislation, implemented July 2014, was aimed at reporting compliance of foreign transactions and assets to the IRS. An interesting case to watch for how the IRS is changing its approach to transfer pricing issues is being played out on a large scale in Coca-Cola Co. v. Commissioner, T.C. On Dec. 14, the company filed a petition challenging the IRS on its proposed $9.4 billion transfer pricing adjustment mainly relating to its foreign affiliates' uses of the company's intellectual property, trademarks and patents which could result in a $3.3-billion tax bill. Under prior successive audits, the IRS agreed to the company's transfer pricing methodology. The departure from this previously established method appears to be based on a study performed by an economist whose analysis was based, according to Coca-Cola in its petition, on wrong assumptions. In addition, the IRS had designated the case for litigation, precluding the company from pursing administrative settlement, an indication the IRS has interest in having the issue in court to use as precedent. While the Coca-Cola case represents large business, the IRS's on-going development of its sophisticated tool-kit to effectively identify and more sharply focus in on a company's international compliance issues is intended for mid-size businesses as well. In regard to transfer pricing, the IRS must only prove the company did not meet an arms-length standard in its cross-border transaction with its affiliate to make an adjustment. In other words, the IRS only must show that the price charged or paid to the related business is different than that charged or paid to an unrelated business. The bottom-line is that as businesses increasingly become multinational, the IRS will continue to focus resources on transfer pricing compliance issues. To effectively address potential exposure, businesses with cross-border transactions with controlled affiliates must develop, implement and document their transfer pricing policies. Transfer pricing studies should be continually updated as facts and circumstances change. n Mary Duncan is a tax manager at Shepherd & Goldstein, LLP in Worcester. Reach her at mduncan@sgllp.com. By Steve Pike Steve Pike is the interim CEO of the Massachusetts Clean Energy Center. Reach him at spike@masscec.com. 10 Things I Know About... Paying taxes on international subsidiary sales KNOW HOW 10. Clean energy is working. There are 8,335 people working in clean energy in Worcester Country. That's more than the entire population of West Boylston. 9. Business is bustling. Those employees are spread out in 616 businesses in Worcester County, in fields like solar, energy efficiency and clean heating and cooling. 8. The sector is growing. The Central Massachusetts clean energy sector grew by 13.6 percent in 2015, outpacing the statewide growth of 11.9 percent. 7. Innovation is happening. The Worcester Cleantech Incubator, opened recently by the Institute for Energy and Sustainability, helps local clean energy entrepreneurs grow. 6. Women lead the charge. There were 13 women in the first graduating class of MassCEC's Successful Women in Clean Energy program, run by Worcester's South Middlesex Opportunity Council and connecting women with jobs. 5. Solar is taking off. There are 583 solar electric systems in operation in the city of Worcester, generating enough electricity to power 950 homes each year. 4. The switch starts at home. Flip to clean heating and cooling at home with a MassCEC rebate for air- source heat pumps, ground-source heat pumps, central wood pellet heating and solar hot water. 3. Things are heating up. Worcester County residents swapped out 88 old woodstoves for cleaner models in 2015, the most of any county during the Commonwealth Woodstove Change-Out program. 2. Career futures are bright. Since 2011, 79 college students and graduates interned at 17 Worcester County clean companies as part of MassCEC's Clean Energy Internship. 1. Mass. is a global leader. The commonwealth is home to some of the brightest emerging clean energy companies, placing eight companies on the Global Cleantech 100, an annual compilation of the most innovative private cleantech companies across the world. B usinesses can be plagued by churn, or how many customers cancel. Those comapnies include insurance companies, gyms and online streaming services. For all businesses — even those without high churn rates — winning back lost clients is a skill worth learning. Here are three reasons to focus on bringing them back into the fold and not replacing lost clients with new ones: Understand that if you lose them, their information goes, too. That data, said V. Kumar of Georgia State University in an article by Angus Greig at Harvard Business Review, is needed to design an effective win-back proposal. Marketing costs need to come into play all over again if you're starting anew. Also, you know they need what your company's selling. "These people have demonstrated a need for the service, making them far better prospects than random names on a cold-call list," said Kumar. Find out what happened. Dave Mattson at Enterpreneur.com said this exercise takes objective listening and tough soul-searching. "Conduct a strengths, weaknesses, opportunities and threats (SWOT) analysis," after speaking with the customer and sales representative to fashion a solution, he said. This process – fixing what's wrong – will help with overall sales. Don't assume getting them back is always best. After you've investigated why the client is leaving, see how it matches up against your business model. If it's more than a simple issue – more of a systematic mismatch – you may be better to let them go. "Suppose the problem is lousy customer support," writes Geoffrey James at Inc.com. "If your business model depends upon providing low- cost (and therefore minimal) customer support, you'll either need to change that business model or carve out an exception for this customer. Is it worth the effort and hassle?" n 101: WINNING BACK CLIENTS >> BY SUSAN SHALHOUB Special to the Worcester Business Journal Clean energy in Worcester BY MARY DUNCAN Special to the Worcester Business Journal

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