The Internal Revenue Service lost two major cases in U.S. Tax Court in recent years dealing with transfer pricing, or how companies value asset transfers and related transactions between subsidiaries that cross international borders.
This field is one of the most contentious in the tax world, with the IRS often struggling to keep up with fast-moving corporations that legally manage transfer pricing to reduce their overall tax rates, but sometimes cross the line.
Here are details of the two recent cases.
* Veritas Software v. Commissioner (2009)
The ruling is viewed by some as a setback to IRS efforts to root out and enforce fair transfer pricing rules.
Software maker Veritas, acquired by rival Symantec Corp, had licensed intellectual property to an offshore affiliate under a cost-sharing agreement covering research and production. The IRS claimed the deal understated the market value of the royalties involved by $2.4 billion, and asserted Symantec owed over $1 billion in taxes, penalties and interest.
In 2009, the Tax Court ruled in favor of Symantec, siding with its pricing calculations in transferring the intellectual property and calling the IRS's calculations "arbitrary, capricious and unreasonable."
The IRS did not appeal the decision, but said it disagreed with it and would not follow it on a nationwide basis for other taxpayers in venues outside the deciding circuit.
* Xilinx Inc v. Commissioner (2005)
The case is seen as widening the scope for multinationals to use or manipulate transfer-pricing rules for financial benefit.
Semiconductor maker Xilinx Inc sued the IRS after the agency challenged deductions the company took under a cost-sharing agreement with an Irish unit. At issue were transfer-pricing calculations and employee stock options.
The IRS sought more than $120 million in penalties and interest, saying the options were not calculated at an "arm's length" standard with the Irish unit.
The Tax Court sided with Xilinx in 2005, saying it did not have to include stock option costs in cost-sharing pools between units. The Ninth Circuit Court of Appeals reversed that decision to rule in favor of the IRS. The same court withdrew its own reversal, only to later affirm the Tax Court ruling for Xilinx.
(Reporting by Lynnley Browning; Editing by Kevin Drawbaugh)