IRS Seeks Truth in Veritas Deal

Symantec, the acquirer, disputes the more than $1 billion in back taxes and penalties that the revenue service believes the company owes.
Karen M. KrollSeptember 21, 2006

Symantec Corp. develops software that battles computer viruses. But these days, the company spends time battling what it considers to be another pest: the Internal Revenue Service.

In June, Symantec filed a petition with the U.S. Tax Court to dispute more than $1 billion in back taxes and penalties that the IRS believes the company owes. The petition labeled the IRS’s claim “arbitrary, capricious, and unreasonable.”

The eye-popping tax bill stems from the transfer-pricing agreements in place between Veritas U.S., which Symantec acquired in 2005, and its Irish subsidiary, Veritas Software International Ltd. The IRS says the amount of income attributed to Veritas U.S. as a result of a technology-licensing agreement with the Irish subsidiary was too low for tax years 2000 and 2001. At the same time, the IRS says Veritas allocated more of the costs of developing software than it should have, boosting expenses at Veritas while lowering its income. (In June, Symantec settled a similar case for fiscal years 2003 and 2004 for $36 million; the IRS wanted $100 million.) The outstanding case is one of the largest transfer-pricing tax disputes ever.

The software company argues that Veritas worked with its outside accountants, Ernst & Young, to develop its licensing and cost-sharing arrangements. In 2004, Symantec approached the IRS in hopes of reaching what’s known as an advance pricing agreement (APA), which would have allowed that the transfer prices the taxpayer was using were comparable to what two unrelated parties would have negotiated. In 2005, the IRS rejected the request. (The IRS and Symantec declined further comment on the dispute.)

Normally, APAs are done prospectively, says Carolyn Fanaroff, counsel with Greenberg Traurig in Washington, D.C. However, taxpayers requesting an APA can also ask for a rollback, which would cover prior years’ transfer-pricing issues.

At this point, it’s impossible to predict how the battle between Symantec and the IRS will be resolved. What is clear is that more tax disputes will arise over transfer pricing. As more U.S. companies have established operations outside the United States, the IRS has taken a closer look at transfer-pricing agreements and is currently revising the rules stating how cross-border services transactions are taxed.