Transfer pricing to be part of tax policy review in next Congress
September 17, 2008
World Trade\Interactive
The Senate Finance Committee’s two senior leaders said recently that transfer pricing issues will be among the topics considered as part of a review of U.S. tax policy the committee intends to undertake in 2009. The comments by Chairman Max Baucus, D-Mont., and Ranking Member Chuck Grassley, R-Iowa, followed the issuance of a Government Accountability Office report that the two lawmakers said “concluded that businesses may be manipulating existing tax laws by shifting corporate income and tax planning to foreign tax rate jurisdictions in which they operate.”
Multinational corporations have various ways to shift income reported for tax purposes, the GAO report states, including the manner in which they price transactions among affiliated entities within the corporate group. U.S. and foreign tax laws provide some incentive for businesses to report net income as coming from locations other than where factors of production, such as labor and physical capital, actually generated that income. For example, among those countries that hosted significant shares of U.S. business activity in 2004, Bermuda, Ireland, Singapore, Switzerland, the United Kingdom Caribbean islands and China had relatively low effective tax rates on the foreign operations of U.S. multinational corporations while Italy, Japan, Germany, Brazil and Mexico had relatively high rates. With the exception of China, the GAO states, all of the above countries with relatively low effective tax rates have income shares that are significantly larger than their shares of the three business activity measures least likely to be affected by income-shifting practices: physical assets, compensation and employment. In contrast, all of the above countries with relatively high effective tax rates except Japan have income shares that are smaller than their shares of physical assets, compensation and employment.
The report suggests that more U.S. companies are shifting activity abroad to lower their tax burdens. From 1989 through 2004, U.S. business activity (measured by sales, value added, employment, compensation, physical assets and net income) increased in absolute terms both domestically and abroad, but the relative share of activity that was based in foreign affiliates increased. In addition, approximately 80 percent of large taxpayers with positive foreign income paid no federal income tax on it and an additional 8.5 percent had positive average effective U.S. tax rates of five percent or less. The GAO points out, however, that tax liability on foreign-source income tends to be low for a combination of reasons, including the U.S. foreign tax credit and the fact that in many cases a substantial portion of such income is not taxed until it is repatriated to the U.S.
Baucus responded to the report by stating that it underscores the need to review business taxes as part of the tax reform efforts he is planning for the Finance Committee in 2009. “Simply put, I do not intend to allow U.S. multinationals to sidestep their fair share of taxes by moving income offshore,” Baucus said. “Rather, they should do their patriotic duty and start to bring their income onshore, along with as many jobs as possible for American workers. This GAO report will help the Finance Committee develop a better understanding of how the tax code works today for U.S. multinational businesses, as we determine how changes could affect our country’s global competitiveness and economic security. ” A committee press release noted that Baucus intends to work with other committee members to plan roundtables and hearings in preparation for “full-fledged tax reform” in the next Congress.
Grassley, the committee’s senior Republican, agreed with the need to examine U.S. tax policy. “The Finance Committee has always been vigilant on transfer pricing issues. It’s a complicated area of tax policy theory and practice, especially if intangible assets are involved,” he said. “We’ll continue to work toward a system that’s less burdensome on taxpayers and tax administrators but assures that shared business activities are properly accounted for in how U.S.-based taxable income is determined.”
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