Taxation

IIC, Inc. provides economic analysis, expert testimony, and advice to both taxpayers and taxing authorities on a wide range of issues related to taxation such as transfer pricing, valuation, tax shelters, licensing arrangements, property taxes, natural resource taxes, characterization of taxes, unitary taxation, allocation of interest expense for tax purposes and tax incidence analysis. We provide economic and financial analyses as well as our knowledge and experience in working with the tax code both here in the United States and abroad.

We have assisted clients in analyzing the appropriate methods for computing transfer prices, royalties, and valuation of tangible and intangible assets under Section 482 of the Internal Revenue Code. We have also participated in the negotiation of Advanced Pricing Agreements (APAs), and we have been involved in evaluating the business purpose and economic substance of various transactions and contractual relationships. Such work frequently involves disputes about the appropriate methodology as well as assumptions and data inputs, and we are careful to provide not only a well-reasoned and defensible approach, but one that is understandable and easily explained.

From time to time taxation authorities impose taxes that may be unconstitutional, unfair, or illegal. Under such circumstances, the tax authority is often faced with perfecting a remedy that does not unjustly enrich the taxed entity. IIC, Inc. has worked successfully with numerous taxing authorities and businesses in crafting remedies that rely on fundamental principles of public finance economics to demonstrate the degree to which the affected entity may have absorbed the tax and the extent to which it passed on the burden of the tax to its consumers.

Tax Issues Related to Conversion of 936 Corporations

IIC, Inc. has been involved in the analysis of various license and royalty arrangements relating to multinational corporations who have manufacturing facilities in Puerto Rico. These subsidiaries operating in Puerto Rico had until recently been set up as Section 936 corporations, and were recently reorganized as CFCs, and our analysis focused on determining the appropriate arm’s length license fees and royalties for the use of various intangibles related to the manufacturing operations. We have also analyzed the transfer pricing between the Puerto Rican entities including other subsidiaries who were either suppliers to Puerto Rico or purchasers from Puerto Rico.

Allocation of Interest Expense

IIC, Inc. reviewed and analyzed the methodologies and computations employed to estimate the fair market value of the tangible assets of a multinational company for purposes of allocating interest expense under Section 861 of the Internal Revenue code. We relied on our extensive knowledge of the petroleum industry and our expertise with valuation methods to critique a valuation of this company’s upstream and downstream assets. Upon completion of our review, we provided our client with a detailed analysis of the upstream asset valuation, including analyses on the value of proven and probable reserves in the United States and numerous foreign countries. As a part of this analysis, we utilized industry information and our knowledge of foreign financial markets to develop an independent risk analysis to value foreign reserves through adjustments to the weighted average cost of capital. In addition, we relied on accepted valuation methods to perform a similar critique of the downstream asset valuation. We demonstrated the existence of several errors in the downstream asset valuation including assets valued with both the replacement cost method and an income approach. We demonstrated that the valuation proffered by the opposing side failed to meet generally accepted valuation principles and that the valuation model was highly sensitive to minor changes in data and assumptions.

Pass-Through of Insurance Taxes to Consumers

IIC, Inc. recently assisted a client with an investigation into state privilege and retaliatory taxes pertaining to the insurance industry. We were contracted specifically for the purpose of determining any possible pass-through of insurance taxes to the consumer, we provided our client with a detailed report outlining our findings. Our work included a comprehensive review of the elasticity of supply and demand for property and casualty, health, and life insurance. We performed numerous statistical analyses to determine the relative amount of pass-through experienced by consumers in a particular state based on cost-price relationships. We also examined the extent to which the imposition of the taxes conferred market share benefits on the firms not affected by the tax.

Tax Liability for Oil Refining and Marketing Company

For a state taxing authority that applies a unitary tax regime, we analyzed the business activities of an oil refining and marketing company to assess whether certain activities were integral to its overall business. We analyzed the relationship between upstream production and downstream refining activities to assess the degree of integration as well as the contractual arrangements that the company used to obtain crude oil to supply its refineries. The purpose was to show that various upstream activities should be treated as part of the unitary business.

Tax Implications of Transfer of Intangible Assets

IIC, Inc. completed an expert report valuing various intangible assets transferred by a domestic parent to various CFC’s operating in different markets for purposes of developing an appropriate arm’s length royalty rate consistent with the Section 482 transfer pricing regulations. We examined the relative profitability contributed by these intangible assets domestically and also applied a CPM approach to the application of the intangibles in various foreign markets. We also reviewed and assessed the Section 6662 transfer pricing report of the taxpayer.

Impact of Tax Expenditure Programs on Small Businesses

Several members of the firm recently authored a detailed study of the impact of various tax programs on the taxes paid by large and small U.S. corporations and partnerships. We calculated effective tax rates for each program, focusing specifically on transfer pricing, foreign tax credit, and R&D credit/expensing rules. We performed several detailed case studies including the pharmaceuticals, computer systems, and telecommunications industries examining tax impacts and computed effective tax rates for firms in these industries.

Proper Tax Treatment of Subsidiary Corporations

IIC, Inc. provided expert testimony in U.S Tax Court on the proper tax treatment and characterization of certain subsidiary corporations that were later sold at a gain. We analyzed the organizational relationship among the entities and the pricing and business policies affecting the nature of their relationship as well as whether the ownership interest could be considered a hedge under IRS authority.

Imposition of U.K. Tax on Privatized Firms

We recently provided testimony in Tax Court regarding a tax imposed in the U.K. on firms that had recently been privatized, and the formula used to compute the tax. We showed that the tax employed a widely accepted valuation methodology such that the tax was based on the difference between two values for the company.

Property Tax Relief for Massachusetts Homeowners

IIC, Inc. provided testimony regarding the impacts of property tax relief on homeowners in the Commonwealth of Massachusetts. We showed that inflation had made existing limits on various exemptions too strict and that greater tax relief was needed for seniors and the disabled.

Property Taxes as Determinant of Business Location

We have also analyzed whether property taxes are a driver of where businesses locate, and using statistical analysis, we isolated the key factors that do determine where business is likely to locate. We showed that property taxes are not an important determinant, but rather that the key factors are location, labor supply, and transportation infrastructure.

Our Experience