Chip Maker Xilinx Loses Tax Ruling

Chip Maker Xilinx Loses Tax Ruling

In a decision that could have wide tax implications for U.S. multinational companies, a federal appeals court handed a victory to the Internal Revenue Service in a dispute over how companies allocate their costs between different countries.The U.S. Court of Appeals for the Ninth Circuit ruled against chip company Xilinx Inc. on Wednesday May 27, overturning an earlier U.S. Tax Court opinion that went against the IRS.The case involves so-called transfer pricing, the complex arrangements companies use to allocate costs and revenue between operations in different tax jurisdictions. Transfer-pricing disputes between multinational companies and the IRS are drawing attention as companies do more business overseas and develop more sophisticated methods for cutting their taxes, particularly in the technology and pharmaceutical industries.In Xilinx's case, the San Jose, Calif., company allocated a portion of its research and development costs to an Irish subsidiary. However, when it came to stock options granted to the company's research employees, Xilinx kept in the U.S. the entire value of the tax deductions related to those options. None of the deductions were allocated to the subsidiary in Ireland, where corporate income-tax rates are significantly lower than in the U.S., thus lowering Xilinx's global tax burden.U.S. Treasury Department regulations dictate that all deductions and income in transfer pricing arrangements are allocated according to an "arm's length" standard - how unrelated companies would share those costs. Xilinx argued that unrelated companies wouldn't have shared the costs of the stock options.By a vote of 2-1, a panel of the appellate court ruled that the costs related to the options had to be shared, which would increase Xilinx's taxable income in the U.S.Xilinx said in a statement Thursday May 28 it doesn't agree with the Appeals Court decision, but that "it's too early to comment on any next steps the company may consider as a result." The company said the decision wouldn't have a material impact on earnings.The panel also held that a regulation limiting the IRS to the arm's length standard is in "irreconcilable" conflict with another regulation that gives the IRS authority to decide how R&D-type expenses should be allocated between corporate subsidiaries. As a result, the IRS could have broad new powers to adjust corporate tax returns."It's the most important transfer-pricing decision in this country in 20 years," said H. David Rosenbloom, an international tax attorney at Caplin & Drysdale. "It goes to the question of how broad the IRS's power is."The decision comes as the Obama administration targets tax-cutting by U.S. multinational companies, looking to raise $210 billion over the next decade by shutting down tactics that such companies use to cut their U.S. tax bills.