Massive Tax Cheating By US Companies?

By asserting in the title line in his Bloomberg article yesterday that US companies are "dodging" $60 billion in US taxes through the use of transfer pricing, Jesse Drucker apparently thinks so.

In fairness however, he does later on refer to the tax move he objects to as being "legal", but the gist and tone of the article ultimately belies that concession.

"Transfer pricing lets companies such as Forest, Oracle Corp, Eli Lilly & Co. and Pfizer Inc. legally avoid some income taxes by converting sales in one country to profits in another -- on paper only, and often in places where they have few employees or actual sales.

Let's be clear. Mr. Drucker provides no evidence and does not even argue that the focus of his article, Forest Laboratories, has in fact cheated on or falsified any of its required US tax filings.

The fact that the US IRS has not chosen to take Forest Laboratories to court in order to fight their transfer pricing practices speaks loudly to the idea that they are doing nothing illegal or shady.

Mr. Drucker's primary objection is simply that the US corporate tax system in effect encourages US corporations to establish Intellectual Property holding companies outside the US, and use those same entities to sell branded products back into the US.

The profits earned by the offshore subsidiaries will be subject to US tax when the profits are ultimately sent back to the parent company. In order to avoid that day of reckoning, US multinationals typically reinvest the profits offshore.

Perhaps Mr. Drucker would be happier if the US employed a "territorial" tax system (as opposed to its current "deferral" system). However, a territorial tax system, which is used by the vast majority of industrialized nations, basically exempts most income generated by offshore subsidiaries from ever being subjected to tax by the home country.

In a deferral tax system, which the US and a few other tax-hungry nations still use, offshore profits are in fact ultimately subjected to tax in the home country, albeit on a deferral basis until the underlying profits are sent back for reinvestment in the home country or for dividend payments made to shareholders.

The best course of action here is to avoid scapegoating US companies, who are already saddled with some of the highest tax rates in the world. If the Jesse Drucker's of the world want to encourage US companies to increase their investment in the US, they should think in terms of reducing US tax rates (down to say Ireland's level), rather than subjecting their non-US earnings to tax in the US.

Lastly, a manufactured scandal wouldn't be complete without a left-leaning politician attempting to pile on:

“Transfer pricing is the corporate equivalent of the secret offshore accounts of individual tax dodgers,” said Sen. Carl Levin, a Michigan Democrat and chairman of the Senate’s Permanent Subcommittee on Investigations, in a statement to Bloomberg News. Levin has overseen hearings on tax shelters including those sold to wealthy people by KPMG LLP. “Now that progress has been made in addressing offshore tax abuse by individuals, transfer pricing is an issue that deserves scrutiny.”

It might be time to think about hanging it up, Carl. Despite your illogical contention, there's simply no comparison between US individuals who hide money offshore and report neither the money nor their accounts as they are required to do, and US companies that attempt to navigate the US transfer pricing rules (written by you and your cohorts in Congress, as well as the IRS!) as best they can and report all accounts and profits to the full satisfaction of the IRS.