Foreword

Corporate tax departments today are caught between increased compliance requirements, more sophisticated research and planning issues and reduced depart-mental budgets. This is the result of ever increasing complexity in the tax law (did we really think Congress was concerned about tax simplification in 1986? You cannot simplify what you do not understand!) combined with the ever decreasing level and/or quality of U.S. corporate earnings.

Enter the issue of foreign-owned U.S. corporations. Always a concern of Trea-sury, payment of "fair share" of taxes by these entities has become a major issue in Congress over the last few years as it looks for scapegoats in light of its continu-ing inability to address the basic economic issues of the country. This has led to an expansion of the tax law in the area of reporting activities between U.S. corpora-tions, so-called "reporting corporations," as defined in the law, and foreign share-holders and parties related to such foreign shareholders (both these terms are also defined in the law).

The stakes have increased significantly in light of the increased attention given to this area. It can no longer be looked at as isolated reporting requirements affect-ing a limited number of U.S. taxpayers. Rather, its relationship with other areas of tax law, notably the transfer pricing area and the record retention area, must be fully understood in order to properly comply with any newly-imposed reporting requirements. These relationships can be summarized as follows:

Treasury's position on intercompany pricing has been public since the 1988 White Paper. The basic tenet of the position is that income earned on intercompany transactions should equate to the respective economic risks assumed by the related parties in the chain of events culminating with the sale, transfer, etc. to the ultimate third party customer. The means of measuring this risk, i.e., third party com-parables, inexact comapables, functional analysis, etc. has been the source of con-troversy. Determination of the proper means of risk measuring is dependent on the information on hand, contemporaneous or otherwise. Reporting requirements applicable to so-called inbound arrangements can easily govern "outbound" rela-tionships between U.S. multinationals and their foreign subsidiaries. All indica-tions are that this will in fact be the case.

The issues of record maintenance and IRS authority to subpoena information not initially provided with the tax return have reached a heightened importance, partic-ularly as tax compliance has become more complicated. The new rules for foreign -owned reporting corporations ostensibly are based on the general record keeping requirements but one wonders if the variations permitted, especially in the "safe harbor" provisions, are in reality a new body of rules that will find application in other areas and to different taxpayers than reporting corporations. This would be consistent with the perception about regarding transfer pricing.

From a corporate tax director's perspective, the possibilities are ominous. There seems to be no limit to the information that needs to be gathered in order to avoid fines and penalties, let alone to substantiate technical positions on audit. The prac-ticalities of balancing the tax concerns with the ability of corporate personnel, within and without the tax department, to effect "letter of the law" compliance will be an overwhelming challenge for the forseeable future.

Accordingly, it is with a great deal of gratitude that I have read Bob Fein-schreiber' s effort to provide some order to the current situation as I have described it above. I look forward to using this book to address not only the immediate issues of a foreign-owned corporation but the plethora of related tax issues that we all can anticipate.

Robert G. Rinninsland
Director of Taxes
Engelhard Corporation
Iselin, New Jersey February 1992