Transfer Pricing News: Is the IRS doing its job?

As previously addressed in this blog, U.S. Multinational Corporations (USMNCs) are circumventing paying taxes in the United States through Transfer Pricing, Earnings Stripping and Inversions.  This blog also questioned whether tax holidays are just tax breaks for USMNCs that have utilized the three methods to avoid US taxation.

In recent news, (CNN Article), the French government has seized records from Google in an attempt to prove that Google evaded French taxes.  Based on the article, the French anti-corruption officers and tech experts raided the Google offices to ascertain the scope of Google's business in France.

In the same article, CNN points out that Google has recently agreed to pay about £130 million ($185 million) to the U.K. government, so this raid by French authorities may be an attempt to get Google to pay additional taxes in France.

While these events are interesting, the real question here is: why isn't the IRS raiding or requesting additional information from Google to ascertain the extent of its U.S. based business activities, so that the IRS can collect taxes in the U.S. despite Google's extensive use of transfer pricing (Dutch Sandwich strategy)?

Another CNN article points out that the EU is starting to tax corporations despite their use of transfer pricing to minimize taxes in European countries.  The article states that if the EU approves the new rules, companies would have to disclose more detailed records, which would be shared by the EU countries to ensure that all the taxes are being paid.  The article also highlights that EU countries are losing about $70 billion dollars in lost tax revenue from corporations shifting income. Finally the article also discusses other USMNCs that are paying additional taxes to EU countries.

These recent EU actions, as stated above, highlight a glaring weakness to the IRS' approach to transfer pricing; namely, why are EU countries able to get the USMNCs compliance with paying additional taxes and the IRS continues to let the USMNCs avoid taxation?

Perhaps this may be another reason why the House is seeking to impeach the IRS Commissioner.  See this MSN article, stating that the House is seeking to impeach the Commissioner due to the political group targeting scandal.  Maybe the Commissioner should direct his attention to transfer pricing and focus his efforts on collecting from the USMNCs that are not paying their taxes like our European counterparts.

If you have specific and credible information about a company utilizing transfer pricing to minimize its US taxes, contact us about filing an IRS Whistleblower claim to assist the IRS in attacking various abusive transfer pricing applications by USMNCs.

Repealing the Estate tax, a big deal or just more noise?

As previously discussed (here), the Joint Committee on Taxation (JCT) has conducted a study of the source of tax revenues for 2016.  As detailed in the JCT study, the Estate and Gift Tax revenues are expected to be 0.59% of the total tax revenue.  See Figure A-3, pg. 25 of the JCT report, as follows:

Furthermore, Figure A-1, pg. 23 of the JCT report reflects that since 1950, the revenues from the Estate Tax has generally declined.  See Chart below:

What is interesting about these charts (A-1 and A-3, above) is that despite the hullabaloo about repealing the estate tax, see this Washington Post article about the most recent attempts by Republicans in the House voting to repeal the estate tax, the estate tax barely makes a blip in total income received by the IRS and since 1950.

Why does the estate tax represent such a small portion of tax revenue?  The simple answer is that the majority of people are exempt from paying estate and gift taxes.  Most people are exempt from estate and gift taxes because the law allows most people to five away either: 1) during their life up to $1,000,000 or 2) at death (as of 2016) is $5,400,000.  Also, annual gifts do not impact the lifetime gift exemption or at death exemption.  The annual gift exemption (as of 2016) is $14,000.  Also if you are married, (with tax planning) you can double the amount of gifts that are exempt from the gift and estate taxes.  Additionally, if you are married, you can transfer your wealth to your spouse (with tax planning) tax free at your death.

So then why is repealing the estate and gift tax so important to Congress?  Simply put, it is an election year and the Congress men and women need their wealthy donors to know that they are watching out for them.  That's the argument of the Washington Post article.  See also the Tax Policy Center's estimate that only about 2 out of 1000 people who die are affected by the estate tax.

See Forbes for arguments in favor and against the estate tax and/or its repeal.  See also USA Today arguing that the claims for harming small business and forcing the rich to sell assets are unfounded, or this USA Today article claiming that the estate and gift tax "punishes success".

If you know an individual who is liable for estate and gift taxes and have specific and credible evidence of their estate tax or gift tax liabilities, contact our office to help you evaluate your information and whether you can claim a tax award from the IRS.  The IRS pays between 15-30% of taxes, penalties and interest collected for unpaid estate tax liabilities.

Taxing the Individual vs. Taxing Corporations: History shows the burden is on Individuals and not Corporations

As discussed in the TaxProfBlog the Joint Committee on Taxation has released its overview of the federal tax system.  Noteworthy in the JCT’s finding is in table A-1 on pg. 23, the corporate income tax revenues received by the IRS has steadily declined since 1950, while individual income taxes and social security taxes continue to rise.  See the chart below:

One possible explanation for the decline in the corporate tax receipts may be the erosion of the corporate tax base by U.S. multinational corporations (“USMNCs”) and their profits shifting from the United States.  See TaxProfBlog and Kimberly A. Clausing (Reed College), Profit Shifting and U.S. Corporate Tax Policy Reform.

Clausing argues that the U.S. is losing over $100 billion dollars a year due to profit shifting efforts of USMNCs.  See Chart below.

Ms. Clausing states that 98% of the profit shifting occurs by USMNCs to jurisdictions that taxes the USMNCs at less than 15%.  Finally, she states that the revenue decrease has grown 5 times over the past decade due to increase profit shifting by USMNCs. 

To combat the erosion of profits to offshore jurisdictions, Ms. Clausing proposes the following small changes to the current taxing regime:

1. Repeal the check the box regulations that facilitates income shifting [for more information on check the box regulations and use in international tax planning, see this Wikipedia article];
2. Tougher earnings stripping laws [Treasury has already instituted additional regulations to curb earnings stripping, see my blog]; and
3. Anti-inversions rules such as an exit tax [See my earlier blog about imposing an exit tax to dissuade corporate inversions]. 

Ms. Clausing also advocates for the following fundamental changes to the existing taxing regime:

1. Worldwide consolidation of corporate returns for tax purposes
2. Formulary apportionment of international corporate income, using a method similar to that used by U.S. states in taxing national income.

Ms. Clausing’s proposal suggests that the U.S. should move to a territorial tax system.  While some have advocated the territorial tax systems would create jobs and raise wages for U.S. workers, see this article by Curtis S. Dubay and the Heritage Foundation, others (Center on Budget and Policy Priorities) have advocated that such a transition would: 1) create greater incentives for USMNCs to invest and book profits offshore, 2) reduce wages in the U.S., 3) would cause larger budget deficits by draining corporate tax revenues, and 4) would shift the tax burden to domestic businesses and small businesses.

Regardless of the solution proposed by either side, the simple fact still remains that individuals in the U.S. continue to bear the brunt of the tax burden, while corporations continue to avoid paying taxes.

If you have specific/credible information about corporations avoiding the payment of tax through transfer pricing, inversions and earnings stripping, 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, inversions and earnings stripping).   Contact us if you want to file a tax whistleblower claim.