Brazil royalties dispute lands 3M, IRS in U.S. Tax Court

WASHINGTON, April 3 Wed Apr 3, 2013 4:21pm EDT

WASHINGTON, April 3 (Reuters) - The U.S. Internal Revenue Service and 3M Co are fighting over royalty payments from the company's Brazilian unit to its U.S. headquarters in a case that highlights how tax complications often emerge from doing business in Brazil.

Brazil has no tax treaty with the United States. Last year, it was the largest U.S. trading partner lacking such an agreement. As a result, the country is often at the center of tax disputes between U.S. companies and the IRS.

The latest one, brought before the U.S. Tax Court in March, involves 2006 royalty payments for use of intangible property - including 3M trademarks for Post-it notes and Nexcare bandages - from 3M's Brazilian unit to the parent company in Minnesota.

The IRS wants to tax the payments and is saying 3M is not bringing enough of them into the United States, while 3M contends it is barred under Brazilian law from remitting more payments, Tax Court filings showed.

3M and the IRS declined to comment on Wednesday.

The dispute suggests the IRS is getting tougher on "transfer pricing," tax professionals said on Wednesday.

This is a hotly contested area of international taxation involving the valuation of assets and capital shifted by multinational corporations among international subsidiaries.

Under Brazil's restrictions, 3M remitted $5.1 million in trademark royalties to the United States in 2006 on about $563 million in Brazilian sales in 2006, the Tax Court filing said. The IRS says 3M should have sent an additional $27.8 million, according to the court documents.

The amount of taxes in dispute is $4.8 million.

"This is really a dispute over each jurisdiction trying to make sure they get their share," said Tatiana Falcao, a research fellow at the International Bureau of Fiscal Documentation, or IBFD, a tax research group.

TAX CUTS BY TRANSFER

Multinational corporations often manage their transfer pricing to cut tax costs, frequently by shifting profits to low-tax from high-tax countries. Governments, including the United States, work to combat these strategies.

"Here's another effort from IRS to come in and make sure it's not getting the short end of the stick," said Guy Sanschagrin, a managing director with WTP Advisors, a tax advisory firm. "The IRS is trying to pick an area to push back on."

A Tax Court win for 3M would deal a blow to the IRS and establish a precedent that "the U.S. must defer to Brazilian law," said Michael Mundaca, a director of tax services with Big Four accounting firm Ernst & Young.

"This is not an issue that will go away" and is not exclusive to 3M, he added.

The case is 3M Company and subsidiaries v. Commissioner of Internal Revenue. Docket No. 005816-13.