US transfer pricing hearings: statements
We would like to highight two presentations in particular. The first is by Martin A. Sullivan of TaxAnalysts. It highlights how just five jurisdictions - Bermuda, the Caymans, Singapore, Switzerland and Ireland - account for almost a quarter of foreign profits of non-financial U.S. multinationals, shows how the problem has been getting worse, not better - citing an annual revenue loss $28 billion over and above the revenue loss if transfer pricing rules were as effective as they were in 1999 - and that number represents a conservative estimate. It takes an example from the pharmaceutical industry, and then looks at arguments about tax losses from transfer pricing in the form of neutrality, efficiency, and subsidies. It then outlines proposed policy responses -
1. Do Not Rely on Revised IRS Regulations ("Over the decades hard-working and highly skilled IRS and the Treasury Department officials assigned to transfer pricing have had to contend with intense political pressure, unfavorable court decisions, and—most of all—a fundamentally flawed framework that gives primacy to the arm’s length standard. These factors have made it impossible to write regulations that can stem the tide of inappropriate transfer pricing.")
2. Reduce the Corporate Tax Rate
3. Elevate the Status of Formulary Methods (see our Transfer pricing page for more on this.)
4. Strengthen Controlled Foreign Corporation (CFC) Rules as Proposed by the Obama Administration
5. A Minimum Tax on Foreign Profits. Sullivan proposes a minimum 10 percent rate.
Reuven Avi-Yonah, Professor University of Michigan School of Law, Ann Arbor. He looks at how the debate surrounding the US international tax rules has revolved around the extent to which the US should tax the foreign source income of US-based multinationals (MNEs) - the "worldwide" versus "territorial" systems of taxation. He examines formulary apportionment and addresses the arguments of its critics. (For more details on formulary apportionment, see our Transfer Pricing page.
See also other testimony:
James R. Hines Jr. Professor University of Michigan School of Law, Ann Arbor, focusing on problems with analysing the data, and criticising the forumlary apportionment method.
Stephen E. Shay (Deputy Assistant Secretary (International Tax Affairs) U.S. Treasury Department describing evidence of major income-shifting through transfer pricing.
Tom Barthold, Chief of Staff, Joint Committee on Taxation
R. William Morgan, Managing Director Horst Frisch Incorporated