Wednesday, May 06, 2009

Did Obama Miss "The Elephant in the Room" Tax Loophole?


Drawing by David Rooney

Multinational corporations, who make up more than 60% of world trade, are not supposed to gain tax advantages by playing the shell game, they often play, by moving their operations to no-tax or low-tax, tax havens, off-shore. These international corporations are supposed to pay taxes on the profits they earn, here, in the U.S., but they don't, thanks much in part to the manipulation of "transfer pricing"- the way multinational corporations shift profits from higher tax jurisdictions to no or low tax jurisdictions, even when they do little to no business in that jurisdiction. In other words, the abracadabra corporations use to make it appear as if profits were earned in low-tax countries, and costs incurred in high-tax countries.

Globalization has greatly increased this practice, and since President Obama, according to the New York Times, missed this "elephant in the room" tax loophole - in his attempt to level the playing field, in his hopes of raising approximately $210 billion over 10 years by curbing corporate loopholes- abusing transfer pricing will only continue to grow at the speed of light.

However, Obama does plan to hire close to 800 new IRS agents, economists, lawyers and specialists to staff international enforcement within the IRS, thus increasing the IRS' ability to "crack down on offshore tax avoidance and evasion, including through transfer pricing and financial products and transactions such as purported securities loans."

The US tax authority has established a special transfer pricing council to help coordinate the IRS’ efforts in the area. Barry Shott, [LMSB deputy commissioner (international)], chairs the council.
But, will 800 new IRS employees be enough to police transfer pricing? And is policing the solution? Or should we redefine "transfer pricing" completely, and replace the current, complex set of rules that currently govern this practice with more effective ones?

Links:

Transfer Pricing Weekly
Full Text: Curbing Tax Havens

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