Some Canadian corporations operating in the U.S. may be targeted by IRS auditors.
Canadian corporations that operate in the United States through a sales and distribution subsidiary (sometimes referred to as "commissionaire structures") may be singled out for IRS audits under the IRS's new corporate audit approach. As a result, taxpayers that use this common structure should ensure the accuracy of their transfer pricing documentation.
The IRS announced a new approach to initiating corporate audits for 2017. Rather than performing comprehensive audits of a small number of taxpayers, the IRS now intends to audit only specific issues or transactions on a large number of clients, including non-filing foreign corporations. The IRS has announced that, as part of this program, it will send letters to non-filing foreign corporations to explain their compliance obligation, and those corporations that do not respond appropriately will be audited. Depending on the number of years a Canadian company has been selling into the United States, these penalties can be significant.
As with non-filing foreign corporations, U.S. sales and distribution subsidiaries are named as one of a dozen issues the IRS will be targeting for audit.
The IRS is concerned that these U.S. entities report losses or small profits on their U.S. returns, which do not correspond with the functions performed and risks assumed. Affected taxpayers may be selected for an issue-based audit, under which an examiner will verify the treaty and transfer pricing positions of the taxpayer, but will not conduct a full audit of all operations. The IRS has developed training for its agents on the technical issues, documentation requests and understanding the documentation.
For more information, contact your KPMG adviser.
Information is current to May 23, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500