Frankenstein Calling: Qualcomm's Unenforced Periodic Adjustment

Abstract

This paper reviews Qualcomm Inc.’s transfer pricing cost sharing arrangement based on forensic economic analysis of public information, including Qualcomm’s SEC and foreign country regulatory filings, documents disclosed during a recent federal court trial, and other sources. The paper finds that Qualcomm is subject to a periodic adjustment that is not restricted by any statute of limitations as long as the covered intellectual property continues to be exploited by the company, even after its cost sharing arrangement has ended or the relevant tax years have been examined and closed, with or without an adjustment to the same issue, even a prior periodic adjustment. If the taxpayer misrepresented its compliance with the 2009 cost sharing transition rule, this could also provide grounds to waive any closing agreements with the IRS reached in its closed examinations, including one or more "no change" exams during the term of the cost sharing arrangement between 2009 and 2018. Qualcomm was enrolled in the IRS "Compliance Assurance Process" that affords the company expedited audits that generally concludes at the time of the tax filing, and the program is often exploited by taxpayers to engage in aggressive transfer pricing profit shifting since transfer pricing documentation is not required to be completed until the date of the tax filing, and only if the taxpayer chooses to complete such voluntary documentation to avoid penalties, if the non-compliant arrangement is discovered on exam. The paper notes that the IRS appears to have allowed Qualcomm to shift the majority of its billions in pretax profits recorded between 2009 and 2018 offshore to a number of foreign shell and/or holding companies in the British Virgin Islands and Singapore, even when Qualcomm executives described their foreign related entity activities in interviews with the IRS and in court proceedings as containing few or no non-routine activities, being managed and controlled by the U.S. taxpayer, and discussing in federal court filings how contracts negotiated and executed by U.S. personnel with U.S. customers and foreign uncontrolled manufactures were subsequently transferred to the foreign tax haven affiliates where the revenue and profits from the contracts were recorded. The paper notes that the IRS has not historically enforced the periodic adjustment regulations of Section 1.482-7(i)(6) since they became effective on January 5, 2009. Qualcomm’s non-compliance with these regulations and its exposure to this tax risk has never to the author’s knowledge been addressed by the IRS in any of the tax years examined from 2009 to the present. Qualcomm does not appear to have ever reflected this tax risk in its SEC filings, specifically in its reserves for Uncertain Tax Positions.

Keywords: Transfer Pricing, Auditing, Forensic Economics, Tax Compliance and Tax Enforcement

JEL Classification: F23, H26, H32, H83, K34, M42