President Obama is making good on promises to crack down on corporate tax avoidance. In his 2010 budget, Obama is proposing a tough new enforcement campaign directed at taxes owed both domestically and abroad, according to tax-news.com. Moreover, in his recent Fiscal Responsibility Summit, Obama discussed the possibility of lowering the statutory corporate tax rate while also closing tax loopholes that allow companies to reduce taxes, according to WebCPA. The report states the loopholes that allow companies to take advantage of transfer pricing to shift revenue to foreign subsidiaries are among those that Obama may close. Congressional scrutiny of transfer pricing schemes has also ramped up in recent years. And Internal Revenue Service Commissioner, Doug Shulman, has repeatedly warned that the agency is ramping up efforts to police the U.S. international tax system and is focusing its compliance efforts in three key areas, including withholding taxes and hybrid entities…and transfer pricing.
Facing economic uncertainty, governments around the world have begun imposing tighter trading rules and aggressively pursuing tax revenues. As a result, multinational organizations are facing increasing demands from different jurisdictions as authorities attempt to collect taxes on cross-border activities. These corporations need to have very clear transfer pricing guidelines in place ahead of any potential IRS audits. Now, from supply chain restructuring, to transfer pricing planning and compliance with documentation requirements, executive search firm, A.E. Feldman says that international tax jobs are opening up. A.E. Feldman President, Mitch Feldman, also notes that talent with expertise in complex transfer pricing matters, particularly international transfer pricing controversy and advanced pricing agreements among the most sought after candidates.
Transfer pricing is the pricing of goods and services, including raw materials, products, and payments such as management fees and intellectual property royalties, within a multi-divisional corporation. Essentially, when one subsidiary sells goods or services to another subsidiary in a different country, the price charged for these goods or services is called the transfer price.
Rules on transfer pricing require multinational corporations to conduct business between their subsidiaries at “arm’s length.” That means all transactions between the subsidiaries should be priced as if the transaction was conducted between two unconnected parties.
But as the New York Times recently explained, some companies abuse transfer pricing schemes by improperly seeking to minimize their taxable profits in the U.S. and shift profits overseas by undercharging or overpaying foreign subsidiaries for goods and services.
The IRS contends the abuse of the tactic deprives federal coffers of billions of dollars in tax revenue each year. In fact, Shulman says that U.S.-based corporations more than tripled their foreign profits between 1994 and 2004, jumping from $89 billion to $298 billion, with 58% of that profit earned in low tax or no tax jurisdictions, according to tax-news.com. The report adds that multinational corporations also increased from 3,000 in 1990 to more than 63,000 in 2007 and the value of foreign tax credits being claimed increased by more than 25% in just two years from 2005 to 2007. Tax-news.com quotes Shulman as saying, “This gives pause to some U.S. taxpayers and policymakers who want to be sure that these corporations are paying their fair share at home.”
Potential abuse of transfer pricing arrangements has led to the rise of regulations as governments seek to stem the flow of taxation revenue overseas. The NYT adds that curtailing transfer-pricing arrangements could force a slew of big corporations to pay large amounts in back taxes and penalties.
In fact, President Obama’s 2010 budget includes an increase in funding for the IRS. Obama’s administration is targeting loopholes that it believes allow multinationals to “play fast and loose with the US tax code and deplete the Treasury’s coffers,” according to tax-news.com. The report quotes an excerpt from the budget summary document notes: “The scope, complexity, and sheer magnitude of the international financial system pose significant enforcement challenges for the IRS in carrying out its tax administration responsibilities. The 2010 Budget includes funding for a robust portfolio of IRS international tax compliance initiatives, and sustains and improves IRS efforts to narrow the annual tax gap of over $300 billion.”
Speaking on Capitol Hill on March 4th, Shulman told a Senate panel that the IRS intends to deploy a number of weapons to counter international and offshore tax avoidance, according to tax-news.com. In prepared testimony for delivery at the Senate Permanent Subcommittee on Investigations hearing on offshore banks and U.S. tax compliance, Shulman stated, “It is of paramount importance to our system of voluntary compliance with the tax law that citizens of this country have confidence that the system is fair.” Shulman added that the IRS would “aggressively” pursue individuals and institutions that facilitate unlawful tax avoidance. Shulman also informed the committee that the IRS has already stepped up audits in this area over the last five months, and that he intends to hire more investigators with international expertise, according to tax-news.com.