From offshore accounts of individuals to transfer pricing scams of corporations
by Linda Beale
crossposted at Ataxingmatter
From offshore accounts of individuals to transfer pricing scams of corporations
From offshore accounts of individuals to transfer pricing scams of corporations
Michigan’s Levin says the next big thing for the government to focus on, now that the offshore accounting schemes of individual taxpayers have gotten its full attention, should be the corporate transfer pricing game.
What happens in transfer pricing? Corporations in the US, for example, may develop a new drug and take out a patent on that drug. If the patent is used in the US and the drug is manufactured here, the corporation will owe US income tax on its profits. That tax is at a 35% statutory rate, but corporations don’t usually end up paying anything near the statutory rate on their economic profits–their effective rates are considerably lower, with many of the large US corporations paying no federal income tax whatsoever, from a combination of accelerated depreciation, loss deduction carryovers, and other “tax expenditures” that act to reduce their taxes (such as the many items in the Code that reduce taxes on Big Oil companies that extract natural resources–at great cost to our environment and coastal beauty, as it turns out).
One of the things multinational corporations do to lower their taxes even further is to shift income offshore. Perhaps they have a reinsurance subsidiary, so they pay reinsurance premiums to that subsidiary and shift their actual insurance offshore. Frequently, the companies that profits are shifted to have almost no employees. They mail be just a mailbox conduit in the Netherlands or the Cayman Islands, where thousands of corporations are “located” in a single four-story building. The tax code has a provision that is intended to empower the IRS to fight such manipulation of income. It’s called the “transfer pricing” provision in section 482, which says that items of deduction, income, credit are supposed to “clearly reflect income”–meaning that taxable income should be related to economic income, except for provisions clearly intended to provide a special benefit (such as subsidies for corporations that Congress has built into the code, like accelerated depreciation and bonus depreciation).
But policing transfer pricing is not easy. It involves detailed facts and circumstances, takes inordinate time, and must ultimately be tried before courts that have been packed by GOP presidents with business-friendly judges, most of whom over the last thirty years have also enjoyed “educational” seminars in Chicago school-style economics funded by the Olin Foundation and sponsored by George Mason law school with the intent of influencing judges’ decision-making in favor of the now-discredited “free market” thinking of Milton Friedman.
Accordingly, a number of tax and business experts have suggested that Congress should scrap the fact-intensive analysis required under current transfer pricing theory for a formulaic approach that would allot a percentage of a company’s profits to the US based on the number of employees, facilities and revenues in the US compared to elsewhere. That sounds like a good idea to me–less audit time required, more objective, and less easily manipulated for the benefit of the corporate taxpayer. As those who’ve read much of my scholarly work will recognize, I have long argued that the ability of a taxpayer to manipulate the income reported to the IRS Is problematic, raising questions of fairness and efficiency and administrability, all of which are important for tax policy considerations.
Bloomberg.com has an article today on the transfer pricing issue, written by a former Wall Street Journal reporter who knows the beat well. I commend it to you for a view of the problem faced by the Congress and IRS as any attempt to crack down on transfer pricing scams gets underway. It describes the “double Irish”. And I have to admit, this was a ruse known widely to Wall Street law firms when I was there in the late 1990s and early 2000s. Have a company in Ireland, have it paid by a company in the Netherlands (which is just a conduit–no real company) in order to get the inter -EU
protection from withholding, have that Netherlands company paid by a company in one of the Island tax havens (Caymans, Bermuda). Behold! Lots of income leaves the US tax rolls, and doesn’t get taxed anywhere else. See Drucker, Companies Dodge $60 Billion in Taxes Even Tea Party Condemns, Bloomberg.com, May 13, 2010.
If you really believed in free market capitalism you should strongly favor having public corporations pay taxes on the profits they report to shareholders rather than keep a separate set of books for the IRS.
But it is funny, when I suggest this on libertarian/conservative blogs I am politely ignored.
For example, thee is now a movement to cut corporate taxes. I suggest fine. Cut the corporate statutory tax rate to 25%. But make it 25% of the profits corporations report to shareholders, not what they report to the IRS.
I know this would create problems for private firms, but it would really make a major step to reduce the role of government in the economy. This is especially true when your realize that tax policy is really a major tools of “industrial policy” of government picking winners and losers. For example the effective tax rate on the oil industry is around 11% to 12%.
Isa tax expert, what do you think of this idea Linda?
This has been going on for decades, politicians rediscover it every time the economy tanks.
Problem is there are not two sets of “books” there are two different sets of accounting rules designed for two different purposes. Could we reconcile the two sets of rules? Only is Congress became sane.
Bermuda is on the OECD “white list” – ie. Bermuda is not a tax haven. You’ll note that the holding companies (Ingersoll Rand and Accenture) have actually been leaving Bermuda for other jurisdictions.
http://bx.businessweek.com/tax–tax-laws/view?url=http://c.moreover.com/click/here.pl%3Fr2021408548%26f%3D9791
And out of the bushes we have a truism appear: “You’ll note that the holding companies (Ingersoll Rand and Accenture) have actually been leaving Bermuda for other jurisdictions. ” Globalization has even other unanticipated consequences, but normalized/rationalized/averaged corporate tax revenue due to off shoring and other schemes is one that is obvious and has been so for many years.
Another is the movement of Corp. Hdqtrs off shore. Then we lose nearly all tax revenue. So the anti-business, anti-banking, anti-(add your own here) just causes more unanticipated consequences. The most obvious is the loss of tax revenue.
Spencer above advocates for a simplified Corp. tax code that edges toward a flat tax. If, so let’s simplify the whole tax code. Then, maybe we can start over in supplying tax advantages to each party’s BFFs.
A simplified corporate tax code edges toward a flat tax? In what way? A flat tax would be a simplification but a simplification is not necessarily a step toward a flat tax. You remember this stuff from that first step toward formal logic in grade school – all dogs are mammals, but not all mammals are dogs.
KH, Yup! It will rain some time soon. All I hear from you is blah, blah, blah. Can’t you add something meaningful?
The scary part is taxes have to come from somewhere. France is notorious for low corporate taxes, but have the highest personal taxes. And the problem isn’t getting any smaller with a $12.5T national debt along with another trillion a year on the way.
Besides, I’m not convinced US corporations are really overtaxed. Many people point out corporate taxes paid, in aggregate, are much lower than the nominal tax rates.
Of course this is due to tax breaks, write offs, etc… so there are “winners and losers”, either because the government picks them, or certain corporations bought enough lottery tickets.
Over time each party’s BFF benefits (Of course this is due to tax breaks, write offs, etc…) add up in the tax code.
Maybe it is time to start fresh.
CoRev,
Try holding up a mirror to your face the next time you decide to express those deep intellectual thoughts. You are wearisome in the extreme complaining about the deficiencies in the arguments of most others while describing the characteristics of your own ideas.
Given that it is not possible to evade the US personal income tax save by renouncing your citizenship, and paying a draconian tax penalty for the priviledge, while as noted the corp tax can be dodged six ways to sunday. Why not abolish the corp tax, immedialty you can raise the dividend and cap tax rate to that on onther income as there is no double taxation. Then you could charge a vat to replace the corp tax. I would add to the expatriation penalty a permanet bar to re-entry to the US (if you don’t want to pay for the US you have no business being allowed in). The vat would need to include personal services companies, and then some form of asset or liablity based tax on financial organization.
Lyle, with today’s trax codes that proposal is as good as many, and probably better than staying the course.
Jack, I’m just calling it like it is. KH has been a serial hit and run comment bully here and on several other blogs. I don’t know if he has taken my comments personally, but when he does respond to a comment of mine it is usually more personal than against the point.