Tuesday, August 12, 2008

Transfer Pricing: One Way Multi-National Corporations Avoid Taxes

According to the Government Accountability Office (GAO), about 28% of large US corporations paid no taxes in 2005. The Washington Post's David Cho reports that Senator "Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using "transfer pricing" to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates."

The SF Chronicle (Carolyn Said) added:

"Adam Hughes, director of federal fiscal policy at OMB Watch, a nonpartisan government accountability watchdog, explained how transfer pricing works."

"A company will incorporate offshore where there are no taxes," he said. "That (parent) company charges the U.S. company lots of money for things like the trademark for the company logo. The U.S. company says, 'I made $50 million, but my stupid parent company charged me $50 million for the logo.' The U.S. company gets to deduct the royalty fees as an expense and move profits to the parent company offshore in a tax-free haven."

"Although the US has one of the highest corporate tax rates in the industrialized world, in actuality, it has one of the lowest rates. "From 2000 to 2005, revenue from federal and state corporate income tax averaged 2.2 percent of the U.S. GDP, compared to an average of 3.4 percent in 30 of its trading-partner countries, according to the Treasury Department."

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