US Software Firms Battle IRS Over Transfer-Pricing Tax Claims

by Mike Godfrey, Tax-News.com, Washington

15 August 2006

US Software firm Cadence Design Systems has become the latest American company to be pursued by the Internal Revenue Service for outstanding taxes related to transfer pricing arrangements with a foreign subsidiary, believed to be located in Ireland.

In a notice filed with the US Securities and Exchange Commission, Cadence revealed that it has been locked in a dispute with the IRS since 2003 concerning an alleged US$143 million in unpaid tax relating to the three tax years between 1997 and 1999.

According to Cadence, the "most significant" of the disputed adjustments relates to transfer pricing arrangements that the company has with a foreign subsidiary, reportedly its Irish subsidiary.

Cadence, a multinational which designs software and hardware tools for the semi-conductor industry, has offices at a business park in Dublin. Ireland has become an increasingly popular investment location for hi-tech US companies, thanks to its low 12.5% corporate tax rate and skilled workforce.

The company has said that it is contesting the IRS's claims.

"Cadence believes that the proposed IRS adjustments are inconsistent with applicable tax laws, and that Cadence has meritorious defences to the proposed adjustments," the filing explained.

Cadence is not the only software company in dispute with the US tax authorities over transfer-pricing arrangements with what are believed to be Irish subsidiaries.

Synopsys, another leading semiconductor design software firm, announced in an SEC filing that it is fighting a $476.8 million claim relating to transactions with a wholly-owned foreign subsidiary, which in this case is Synopsys International Ltd (Dublin), according to the Irish Independent.

Meanwhile, Symantec, the maker of Norton, the popular anti-virus software, is locked in an ongoing dispute with the IRS concerning a $900 million claim for unpaid taxes in connection with a technology license agreement between Veritas, which the company acquired in July 2005, and a foreign subsidiary. This subsidiary is also believed to be located in Ireland.

Symantec has only recently settled a separate $100 million transfer-pricing tax claim relating to the 2003 and 2004 tax years by agreeing to pay the IRS $36 million excluding interest.

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