| WASHINGTON, April 3
WASHINGTON, April 3 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
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.