Tax `Shenanigans' Turn U.S. Sales to Foreign Income With Billions Offshore

[cory777]

Source: Bloomberg

A U.S. tech company identified only by the pseudonym “Delta” generated as much as 55 percent of its revenue domestically while reporting to shareholders that only 10 percent of its pretax income came from U.S. operations, according to a report presented to the House Ways and Means Committee.

By attributing more earnings to countries with lower tax rates, including the Netherlands and Singapore, “Delta” cut its worldwide average tax rate to less than half the 35 percent rate in the U.S., said the report by the Joint Committee on Taxation, presented yesterday.

Such income shifting, gleaned from actual tax returns in a rare glimpse into the tax structures of six U.S. multinational companies, reflects a strategy that critics call abusive. Companies that use it may be depriving the U.S. treasury of as much as $60 billion a year, according to a study published in December by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.

Multinationals “shift the burden of paying for our national security and homeland security and other public services to small businesses and family taxpayers, who play by the rules and do not engage in these shenanigans,” said U.S. Representative Lloyd Doggett, a Texas Democrat who is on the Ways and Means committee.

Read more: http://www.bloomberg.com/news/2010-07-23/tax-shenanigans-turn-u-s-sales-to-foreign-income-with-billions-offshore.html

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[jody]

1. Interested persons need to review "transfer pricing" used by multinational corporations to shift

profits offshore while maintaining corporate headquarters in the US for protection of their worldwide assets by our Departments of State, Commerce, Defense etc.

That's having your cake and eating it too.

See http://en.wikipedia.org/wiki/Transfer_pricing

[sui generis]

2. well - it's a fact of non-protectionist international commerce.

It's not JUST about shifting money around and though. You capitalize on currency exchange trends, loan guarantees, intercompany balloon payments, and they're not all just paper companies.

Johnson & Johnson is a perfect example with the Taxol process of reusing chemical precursors in different parts of the reaction and different spinoff compounds across the globe where different factories specialize in one branch of pharmaceuticals or another.

There is actual product moving underneath the pricing, and it does capitalize on where it's going to and how long it stays there.

Where it is considerably "grayer" is in finance-only transactions where a participating company can "realize" a portion of its profit in an overseas paper company, use it to pay off some gray market debt guarantee and have the resulting "payback" in the form of increased capital gains be used to recharacterize the income from ordinary to capital gains. Moreover the IRS merely requires a 10% estimated rate for domestic partners, so the difference between estimated and actual can be floated to build more profit before paying actual taxes.

[jody]

4. Agree on all your points and with US hdq, multinationals are protected by a government paid for by

the working poor and by military men and women with their bodies.

[sui generis]

7. yes but there are "good" multinationals and there are "bad"

multinationals, at least relatively speaking.

I think the rationale for foreign manufacturing is flawed in most cases, because it takes advantage of different labor and lower environmental standards for cheaper production in many cases, so it could be said that some multi-part manufacturing also is paid for by the environment and by underpaid labor in foreign countries.

The way investment firms get away with it is that they "own" debt on firms that do manufacturing in other countries that never were American firms to begin with (Ducati is one example that comes to mind), and where steel is purchased in one country, milled another, and assembled in yet a third, or where the debt guarantees their vendor's bills from all over the globe. So the investment itself pays off the vendor bills in their various countries of origin, allows new product to flow into production, increases the value of the original company and leads to a profit for the investor. That profit is then offset against where the underwriting was satisfied and dollars get shipped around on the books in "intercompany" transactions that essentially block tax burden and recharacterize income as it is passed through and back into the original target investment.

The net result is that taxes are paid in multiple countries at lower rates than merely in the U.S. at the higher rate, but the increase in net profit to the participating investors, pension funds, greedy uberrich, retirement plans, charities, endowments and trust fund brats all mixed in together, is that more money flows back into the U.S. economy, with mutual funds and yes, some hedge funds performing better as a result.

The working poor and military don't pay for it necessarily directly, but lower U.S. tax revenues and tighter federal budgets end up being the result. The U.S. treasury can't really insert itself into real manufacturing transfer pricing in any useful way, since it would be out of jurisdiction in most cases. Now about pure paper pass throughs and re-characterizations - "offshore" bahamian and lichtensteinian countries take advantage of international law so that they themselves can profit by holding and passing through money as transaction intermediaries - I think there are smarter ways for regulation to expose bogus recharacterizations and net more money for the U.S. treasury, but I don't think they retain the will or the brainpower to do so effectively.

[dipsydoodle]

3. Yup

Transfer pricing.

[barb162]

5. And do we see anyone in the administration or congress trying to

stop this crap. In a few years the corporations will be running the world.

[Donnachaidh]

6. And we wonder WHY there was such a mad rush for Free Trade

Yeah, they not only outsource jobs, they play three card monti with their books. Yup -- NAFTA, the gift that keeps on giving -- to the ELITE.