International Business Law

Middle-Market Taxpayers on LB&I Radar

December 6, 2010, 11:07 AM

On November 9, 2010, the IRS Large Business and International ("LB&I;") Division Commissioner, Heather Maloy, announced that the IRS needed to shift the division's historic focus to industry cases ("IC") as opposed to coordinated industry cases ("CIC"). LB&I; handles both types of cases, and Maloy recognized that the historic focus of the division prior to reorganization was on CIC taxpayers but that the area of lowest compliance fell with the ICs. CICs are generally defined as those cases that have 12 or more points assigned on its tax return. Points are based on various criteria including the taxpayer's operating entities, gross receipts, gross assets, multiple industry status, total foreign assets, total related transactions, and foreign tax. Once the threshold points have been met and the application of team examination procedures are warranted, the taxpayer and its effectively controlled entities may be considered a CIC. Taxpayers that do not meet this definition are generally defined as ICs unless the taxpayer's situation warrants the inclusion as a CIC. The examination procedures for both types of cases are similar and, until the recent reorganization of the LB&I; division, the focus has generally been on CICs. Maloy conceded that the ICs have generally enjoyed little risk of being audited. More information regarding the IRS's procedures and guidelines with respect to ICs and CICs can be found in the Internal Revenue Manual Section 4.46.2.

Transfer Pricing Enforcement Still a Challenge

December 3, 2010, 4:01 PM

On November 4, 2010, the IRS Advance Pricing Agreement ("APA") program director, Craig Sharon, revealed that the IRS is hopeful that it will be able to close the gap in transfer pricing enforcement due to the recent restructuring of the Large Business and International Division ("LB&I;"). The IRS admitted that its current transfer pricing enforcement falls behind its foreign counterparts and noted that more than 80 percent of double-tax cases before the United States competent authority are foreign-initiated adjustments. As a result, the volume of cases has increased as well as the number of affected countries. In order to combat the ever-evolving and expanding area, the IRS is looking to implement more of the APA principles with the intent to avoid contentious audits and provide real-time advice rather than the traditional unilateral focus of transfer pricing enforcement. According to Sharon, doing so has resulted in greater transparency, cooperation and disclosure amount foreign jurisdictions. Interestingly enough, Sharon stated that foreign countries are now sharing information in new ways. Furthermore, thanks to the Organization for Economic Co-Operation and Development exchange group, more than 500 taxpayer information exchange agreements have been executed by countries in the past 18 months. For more information on the recent restructuring of the LB&I; Division and the options for fast track settlement, please click here and here respectively. --Elaina L. Blanks

Timeliness of Accelerated International Penalty Review Being Monitored By IRS

December 1, 2010, 10:04 AM

On November 3, 2010, the IRS Appeals division assigned an international specialist coordinator to monitor and ensure that the IRS is meeting the new one hundred twenty (120) day accelerated review that is available to the qualified post-assessment, prepayment international penalties. Assigning the coordinator complements the IRS's recent publication of guidelines for a taxpayer's right to appeal assessed international penalties. In order to receive the accelerated review, the taxpayer must qualify as a Category 1 taxpayer defined as either 1) a taxpayer whose assets total $100 million or more or 2) a taxpayer that is specifically designated as Category 1 by the IRS. (Click here for my previous blog regarding the IRS's new guidelines for appealing international penalties). The IRS Appeals deputy chief stated that Category 1 designation must be in the best interest of tax administration and only used sparingly. If eligible, the taxpayer may elect (but is not required) to receive accelerated review through the filing of a protest. Once a protest is filed, collection activity is suspended during the Appeals review. If unsuccessful in the review, the taxpayer will not be allowed to contest the penalty a second time. If the taxpayer chooses to not elect accelerated review, the standard claims procedures remain available but without the 120-day turnaround. This new program should hopefully reduce the burden on taxpayers significantly. - Elaina L. Blanks

Transfer of Shares in CFCs to Qualify as Tax-Free

November 30, 2010, 11:01 AM

On November 1, 2010, the IRS issued a letter ruling (LTR 201043021) permitting the tax-free transfer of shares in several controlled foreign corporations ("CFCs") to a new holding company under Sections 351(a) and 357(a) of the Internal Revenue Code ("IRC"). In essence, three entities were organized in three separate countries, all classified as corporations and all qualified as CFCs within the meaning of IRC Section 957(a). All of the equity interests of the CFCs were owned by a holding company that was organized in the United States and taxed as a corporation. The holding company was owned by a parent corporation that desired to transfer the CFCs to a new holding company ("NewCo") for several business reasons. To accomplish this, the holding company formed NewCo in a foreign company and transferred the stock of the CFCs to NewCo in exchange for voting and nonvoting stock in NewCo. The IRS determined that no gain or loss would be recognized by the holding company or NewCo upon the transfer, exchange, and receipt of the stock of the CFCs. Furthermore, the IRS noted that the holding company's aggregate basis of the received stock would remain the same as the stock of the CFCs, as allocated between the voting and nonvoting stock received. Likewise, the basis of the shares of stock received by NewCo would remain the same as the basis of those shares in the holding company before the transfer. Finally, the IRS provided that the holding period of the stock would include the time that HoldCo. held the stock pursuant to IRC Section 1223. Please note that letter rulings cannot be used or cited as precedent. - Elaina L. Blanks

Back to the U.N. Sales Convention Differences with UCC

November 12, 2010, 12:57 PM

If, whether intentionally or inadvertently, a seller and buyer located in different "contracting states" proceed with a transaction governed by the Sales Convention, then they should be cognizant of the key differences in the governing legal standards compared to the UCC. I will summarize some of these differences over the next several posts.

C-TPAT Violations, Penalties, and the Appeal Process

November 11, 2010, 3:41 PM

Acquiring C-TPAT membership will just get your business in the C-TPAT front door. In order to maintain C-TPAT membership status, and all the benefits that flow from the membership, your business must continue to comply with the programs minimum security criteria. If your business illustrates a lack of compliance with C-TPAT requirements, then it may be removed or suspended as a C-TPAT member. The final decision to remove or suspend C-TPAT membership is within the authority of the C-TPAT Headquarters Program Director, who bases the decision on reports and recommendations from C-TPAT field managers. In the event your companys membership is removed or suspended, this decision can be appealed to U.S. Customs and Border Protection Headquarters. During the appeal process, your business should submit all relevant information to demonstrate how the business has addressed the issues that resulted in the suspension or removal and a plan to remain in compliance with all C-TPAT requirements in the future. --R. Ellen Coley

C-TPAT Membership Benefits

November 5, 2010, 3:40 PM

C-TPAT membership status will open the door to several benefits. For instance, C-TPAT members are less likely to incur a security or compliance examination compared to a non-member. For the C-TPAT members cargo that is selected for examination, the member is given front of the line privileges, allowing the container to move ahead of all non-member containers awaiting inspection. These and other C-TPAT benefits result in the ability to better predict the time and cost of shipping cargo, a decrease in supply chain disruptions, a decrease in wait times for carriers at the border, and the ultimate result of an increase in customers and revenues. An additional fringe benefit is the marketability that C-TPAT membership may bring to your business. C-TPAT membership can positively impact a businesss reputation and help secure business with other business that may require C-TPAT compliance and/or membership. For more information on C-TPAT benefits, please visit

Should Your Business Become a C-TPAT Member?

November 1, 2010, 9:27 AM

C-TPAT membership is open to the following types of businesses: U.S. Importers of Record, U.S./Canada Highway Carriers, U.S./Mexico Highway Carriers, Rail Carriers, Sea Carriers, Air Carriers, U.S. Marine Port Authority/Terminal Operators, U.S. Air Freight Consolidators, Ocean Transportation Intermediaries and Non-Vessel Operating Common Carriers, Mexican and Canadian Manufacturers, Certain Invited Foreign Manufacturers, Licensed U.S. Customs Brokers, Third Party Logistics Providers, and Long Haul Highway Carriers in Mexico.

Is Your Company on The List: Getting into the C-TPAT Club

October 28, 2010, 2:03 PM

Picture an exclusive event where everyone is trying to get in the door. The line is around the building and you have been standing in line for hours and yet you keep seeing some people go straight up to the front of the line, flash their C-TPAT membership card and immediately get in the door. This is happening everyday in the international trade world, and if you want your company to have a fast pass to the front of the line, your company is going to need a C-TPAT membership card.

Foreign Corrupt Practices Act (FCPA)

October 27, 2010, 9:57 AM

For those of you doing business in notoriously corrupt countries, I hope you saw the front page story in the October 8, 2010 edition of The Wall Street Journal detailing the Justice Department's current FCPA investigation of Schlumberger Ltd. related to its dealings in Yemen. Schlumberger's legal woes result from its alleged acquiescence in urgings from Yemen's Petroleum Exploration and Production Authority to hire a local Yemeni intermediary, Zonic Invest Ltd., an entity owned by the nephew of Yemen's president. (According to The Wall Street Journal story, Schlumberger allegedly paid Zonic a total of $1.38 million, including a $500,000 signing bonus and payments for "services" of dubious authenticity.) Schlumberger would be well advised to take the Justice Department's investigation seriously, especially in light of a number of recent settlements and fines paid by companies accused of violating the anti-bribery provisions of the FCPA, e.g.,

Fast Track Settlement An Option for a Better Resolution?

October 21, 2010, 2:12 PM

Along with the advent of the new Large Business & International ("LB&I;") division of the Internal Revenue Service ("IRS") (see earlier post regarding the new division), comes the joint dispute resolution division known as the LB&I;/Appeals Fast Track Settlement program ("FTS"). TheFTS program (which is also available for other divisions) has been touted by the IRS as a method for qualifying taxpayers to have their disputes resolved with an IRS Appeals Officer in 120 days or less a process that can easily surpass 2 years under normal resolution procedures. Appeals officers have mediation and delegated settlement authority. Qualifying for this program requires the completion of a one-page form (Form 14017) and is generally available to taxpayers who are already within theLB&I; division and can also be used to resolve certain disputed issues before the tax return is filed. In addition to the reduction in the length of the time for resolution, theFTS program has additional goals of providing independent reviews and ensuring that all parties participate in the mediation and resolution. Participation is voluntary and the taxpayer may withdraw from the process after it has begun. On September 23, 2010, the IRS announced that theFTS program has proven to be successful with an 85% resolution rate. Click here for more information regarding this program and its availability. --Elaina L. Blanks

International Tax Administration Becomes a Focus for IRS Division

October 18, 2010, 2:53 PM

On October 1, 2010, the IRS completed its realignment of the Large and Mid-Sized Business division (LMSB) to the now expanded Large Business and International division (LB&I;). The IRS's intent is to create a more centralized unit to address what it deems to be an ever-growing concern regarding international tax compliance for both individuals and businesses. Prior to the change, theLMSB generally handled matters involving businesses with assets that were greater than $10 million and other select high wealth individuals. Now, the IRS has expanded that division to address certain high-risk international compliance issues such as undisclosed offshore accounts and transfer pricing. The IRS added approximately 900 employees to the newLB&I; division, thereby bringing the total employees in the division to approximately 1500 and includes a transfer pricing director and a chief economist. The IRS hopes to provide greater consistency with its handling of international issues as well as oversee the implementation of the Foreign Account Tax Compliance Act (FATCA) that was signed into law on March 18, 2010. More information about the new division and the IRS's announcement can be found at,,id=226284,00.html. -- Elaina L. Blanks

Credit for Foreign Gross-Basis Withholding Tax

October 14, 2010, 10:55 AM

On September 23, 2010, the Internal Revenue Service ("IRS") supplemented its prior exception from the application of IRC 901(l)(1) regarding transactions involving back-to-back licensing arrangements and retail distribution arrangements of certain intellectual property (such as copyrighted articles) entered into in the ordinary course of business. Notice 2010-65. Section 901(l)(1) generally disallows a credit for foreign gross-basis withholding tax on any item of income (other than dividends) or gain if 1) the recipient has not held the property for more than 15 days (within a 31-day testing period) exclusive of periods during which the recipient is protected from risk of loss (Section 901(l)(1)(A)) or 2) the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Section 901(l)(1)(B). This provision and its application was originally addressed on November 30, 2005, when the IRS stated that payments in certain back-to-back computer program licensing arrangements qualified as an exception to the application of Section 901(l)(1)(B). Notice 2005-90. Taxpayers can rely on this notice and its guidance for amounts that are paid or accrued after September 23, 2010. Regulations will be issued by the IRS and the Treasury Department incorporating this guidance. For more information please visit: --Elaina L. Blanks

IRS Provides New Guidelines for Appealing International Penalties

October 13, 2010, 2:40 PM

In August 2010, the IRS published guidelines with respect to a taxpayer's right to appeal international penalties assessed against the taxpayer on a prepayment basis. The new guidelines, located in section 8.11.5 of the Internal Revenue Manual, outlines the taxpayer's prepayment appeal rights. The taxpayers are divided into two categories and, depending on the category, the taxpayer will either be able to receive accelerated or non-accelerated pre-payment appeal rights. The first category ("Category 1") taxpayers are those with assets totaling $100 million or more or who have been designated a Category 1 taxpayer. The penalties that qualify under this category generally are associated with a taxpayer failing to provide information or maintain records related to transfers or exchanges between or to certain foreign corporations and foreign financial asset information ("Section 6038 Penalties"). The second category ("Category 2") taxpayers are generally those that are not Category 1 taxpayers or taxpayers who are assessed with penalties for failing to provide a statement relating to resident status, gifts from foreign persons or termination by an individual losing US citizenship. The Category 1 taxpayers that have a qualifying penalty assessment are eligible for the accelerated pre-payment appeal procedures. The Category 2 taxpayers that have a qualifying penalty assessment are eligible for the non-accelerated pre-payment appeal procedures. Click here for more information on the new international prepayment program.

U.N. Sales Convention Holdouts

October 11, 2010, 11:19 AM

If one scans the list of contracting states, one will notice prominent holdouts, including Brazil, Great Britain, India, Ireland, South Africa, and Taiwan. (Japan, on the other hand, finally became the 71st contracting state when it acceded to the Sales Convention effective on August 1, 2009.) Why have a handful of important trading countries balked at adopting the Sales Convention when the other significant economies of the world (and many insignificant ones too) have embraced it? Great Britain, for example, apparently believes that its renowned common law and supplemental domestic legislation are superior to the U.N. Sales Convention, a smugness that the British may continue to indulge in the absence of any compelling evidence that their economy is suffering damage due to this legal aloofness. However, I find this diffidence on the part of the British to be curious given their historic obsession with maintaining London as a center of international commerce and as a preferred forum for international litigation and arbitration. Although the London Court of International Arbitration has long served as a popular arbitration venue among internationally active businesses, one might assume that commercial parties would become increasingly reluctant to choose London as the location to arbitrate a dispute governed by the U.N. Sales Convention, since practitioners located there would presumably have less familiarity with the animating principles and specific legal rules embraced in the Sales Convention. Charles V. McPhillips

The Sales Convention (continued)

October 5, 2010, 11:22 AM

For companies located in the United States, the U.N. Sales Convention applies only to transactions with business counterparts located in other "contracting states." Accordingly, a sale occurring strictly within the borders of the United States between companies of disparate nationalities would not be governed by the Sales Convention. However, unless the parties otherwise agree, a purchase and sale occurring between a U.S.-located company and a counterpart located in any of the other 75 contracting states would be governed by the Sales Convention. Therefore, if a U.S.-based company desired to avoid application of the Sales Convention, it would be necessary for the buyer and seller to expressly agree on its exclusion. In this regard, a clause merely stating that the contract will be "governed by the laws of the State of ___________" will, ironically and perhaps surprisingly, result in the application of the Sales Convention. This is so because the "supremacy clause" found in Article VI of the U.S. Constitution requires the states to recognize U.S. treaties as the supreme law of the land: i.e., the Sales Convention is the law of each state. Consequently, parties seeking to escape from the Sales Convention must expressly exclude its application when stipulating a preferred jurisdiction in the contract's choice of law clause. --Charles V. McPhillips

Buying and Selling Products Abroad

October 4, 2010, 4:08 PM

Many business people and their attorneys are familiar with the Uniform Commercial Code in effect throughout the United States (except Louisiana). However, they often fail to grasp the reality that the UCC will not govern their international purchases and sales. On the contrary, when goods are shipped between a seller and buyer in different countries, there are several possibilities as to which body of law will apply: the law of the seller's country; the law of the buyer's country; a third country where the contract or any material portion is to be performed; or perhaps a fourth country whose law is invoked by the parties in their contractual documents. Increasingly, however, a fifth possibility is now the greater probability: i.e., the United Nations Convention on Contracts for the International Sale of Goods (the "Sales Convention"). At present, the United States and 75 other countries have adopted the Sales Convention, meaning that sales occurring between parties located in two or more of these "contracting states" will be governed by the Sales Convention absent special circumstances or an agreement to the contrary. --Charles V. McPhillips

Welcome to K&C's International Business Blog

September 29, 2010, 9:59 AM

Cad Mille Failte. A hundred thousand welcomes to the Kaufman & Canoles International Business Law Blog! With the able assistance of my colleagues, Elaina L. Blanks and R. Ellen Coley, we will strive to bring current, useful legal information to the aid of businesses and individuals involved in importing and exporting goods, services, technology and capital. Ellen's postings will initially focus on U.S. Customs and export-control issues and Elaina's on international tax planning. Reflecting my background as a business lawyer, my postings will cover a host of international commercial law topics, including international sales contracts; international distribution and agency agreements; international payment mechanisms; U.S. export licensing requirements; international joint ventures; The U.S. Foreign Corrupt Practices Act and Anti-Boycott Regulations; and international dispute resolution. We will welcome your questions and feedback as we all strive to improve our command of the challenging issues confronting companies that have entered the international marketplace for products, services, technology and capital. Charles V. McPhillips