Howard Gleckman does:
It is true that bringing US corporate rates in line with our trading partners may reduce incentives for improper transfer pricing. But there is a flaw in Hassett’s argument: While these practices are aimed at reducing tax lability, they do not represent real economic activity. And limiting income shifting won’t significantly increase domestic employment.
He was noting this presentation:
Kevin Hassett, chair of President Trump’s Council of Economic Advisers, argued today that the corporate tax cuts in the Sept. 27 Republican Unified Framework would boost overall economic growth. How? In large part because its corporate tax rate reductions would encourage firms to shift jobs from overseas to the US. But the claim is unsupported by the evidence. In a speech at the Tax Policy Center today, Hassett said that the GOP plan would not only increase domestic employment but also raise worker wages by an average of $7,000. That is quite a promise, but after unpacking his argument, it seems improbable at best. His claim: Making statutory US corporate tax rates competitive with the rest of the developed world would encourage firms to stop inappropriate transfer pricing, corporate inversions, and other income-shifting practices. Half of the US trade deficit, he said, results from transfer pricing.
Half of our trade may come from related party transactions and in some cases, transfer pricing manipulation may be significant. But to claim that half of our trade deficit is due to non-arm’s length pricing seems to be quite the stretch. Let me also suggest that this corporate inversion discussion is a distraction as all that does is to turn the tax system into a territorial one where the repatriation tax disappears. Isn’t ending the repatriation tax one of the Republican proposals? OK – we might see a lot of foreign sourced profits coming back home but this simply means shareholders get their dividend checks sooner. Any claim that it would dramatically increase investment is not only bad finance but also rejected by the evidence from our last experiment with a repatriation tax holiday. Gleckman also notes:
the territorial tax system that the Big Six outline contemplates could further encourage US firms to shift revenue to lower-tax jurisdictions since that model would exempt the income of foreign subsidiaries from US tax.
While this could be an issue with ending the repatriation tax, other nations have addressed this by more aggressively enforcing their transfer pricing rules. We could do the same if the Republican Party decides it is time to properly staff the IRS.
One important criteria that taxing authorities use when evaluating transfer pricing is the number of employees in that jurisdiction. The more employees in a jurisdiction they will argue means more “economic activity” occurs in that jurisdiction. Therefore companies, at the margin, will locate more employees in a low tax jurisdiction than a high tax one.
Sammy – I guess that is the theory but it does not work out that way in practice. Places like Bermuda and the Caymans park a lot of profit but there are not a lot of workers there. Of course this is a metric being scrutinozed under the BEPS project.
What often gets labelled as transfer pricing abuse turns out not to be anything of the kind. Tax structures are different around the world and intentionally so in certain countries looking for business. So firms will put elements of their business processes in places that are most beneficial. Then the cry goes up that it is a transfer pricing abuse, yet rarely are companies penalized for this because they typically actually do the process in these places. They meet the law and account for it using accepted accounting standards. It frustrates many who would like that activity to be done in the United States (or UK or wherever they think taxes ought to accrue from it) but valid cases of completely faking the activity or accounting for it using not accepted standards is rarer than perhaps many people think it to be,
Eric – I agree that not all accusation of transfer pricing abuse are spot on. There is an entire cottage industry of professionals that write defenses of transfer pricing policies for multinationals. In my view – Starbucks has been wrongly accused and if they want me to write their story – I’d be glad to for a fee (so I could buy coffee that I actually like). But there are many cases where the income shifting to tax havens is as abusive as the left wing organizations suggest. I have put only a small sample of these abuses in past posts at Angrybear and Econospeak. I just wish the tax authorities would pay me a small commission for the additional taxable income a good analysis would generate.