As discussed in my prior blog, Inversions are one method that corporations (formerly located in the United States) can shift their income offshore and not be taxed in the United States. While this is one method to increase profits and earnings outside the United States and away from taxation, another method would be to utilize transfer pricing. See Bloomberg articles (http://www.bloomberg.com/news/articles/2010-05-13/american-companies-dodge-60-billion-in-taxes-even-tea-party-would-condemn or http://www.bloomberg.com/news/articles/2010-05-13/exporting-profits-imports-u-s-tax-reductions-for-pfizer-lilly-oracle) for a brief background about transfer pricing.
As everyone is aware, Tim Cook, Apple’s CEO was recently featured on 60 Minutes defending Apple’s Transfer Pricing operations. In the interview, Tim Cook claims that he is not bringing back the money to the United States because 40% would be stripped away for taxes. Mr. Cook’s comments are interesting because by characterizing taxes paid to the US as striping away value implies that the profits were not subject to tax in the first place. Mr. Cook’s comments ignore the fact that in the United States, corporations are taxed on worldwide income and that the tax on the profits that Mr. Cook alleges are being stripped of their value by 40% were to have been paid to the U.S. government prior to shifting the profits offshore through transfer pricing.
For a re-cap of Apple’s Transfer Pricing efforts, see Exhibit 1 of the Congressional Permanent Subcommittee on Investigation’s (“PSI”) report on Apple’s Transfer Pricing efforts.
But Apple is not the only company taking advantage of transfer pricing to shift its profits offshore and to avoid taxation in the United States. See Reuter’s article re-capping the Citizens for Tax Justice’s and the U.S. Public Interest Research Group Education Fund’s report on the top US companies holding over 2.1 trillion dollars offshore or Rolling Stones article about companies avoiding U.S. taxes.
For more information on the other companies taking advantage of transfer pricing see the Congressional PSI hearings on Microsoft and Hewlett Packard. Also see Bloomberg’s article on Google’s use of transfer pricing to lower its tax rate to 2.4% or Bloomberg’s article about pharmaceutical companies using transfer pricing.
The problem people have with the large multi-nationals isn’t that they are using transfer pricing, but that they are using transfer pricing to avoid paying tax on profits, and then flaunting the use of the untaxed funds. See Apple’s use of debt instruments to utilize its offshore cash horde to avoid paying taxes. See also Congressional PSI’s report on the use of the alleged undistributed accumulated foreign earnings utilized in US assets (in US bank accounts or in US treasuries or US corporations.
If you feel strongly about the injustice of transfer pricing and have specific/credible information about corporations avoiding the payment of tax through transfer pricing, you can get involved in preventing/limiting the tax avoidance by filing an IRS tax whistleblower claim. The IRS pays an award between 15% to 30% of the tax collected to a whistleblower with specific and credible information about a corporate taxpayer’s avoidance of tax (through transfer pricing, or other methods). Contact our firm if you want to file a tax whistleblower claim.