Importance of Transfer Pricing Rules

A critical concern for many multinational corporations, regardless of whether the parent company maintains its tax residence in the United States, Japan, the United Kingdom, or elsewhere, is the manner in which in which it prices goods, services, and intangibles, such as the results of research and capital transferred to its foreign affiliates. Transfer pricing rules and guidelines used to price goods transferred among affiliate companies and across jurisdictional boundaries have more impact on which governmental jurisdiction taxes the income generated from international transactions than any other aspect of the tax law. Transfer pricing rules and their consequences are drivers of tax collections for many industrial nations and a focal point of international taxation and international tax planning.

What this results in is a form of competition between countries on transfer pricing rules in an effort to increase international trade and deflect profits into each competitor’s tax coffers. The concern of many multinational companies, of course, is to avoid double taxation, tax penalties and rigorous transfer pricing protocols and pricing checks. The international tax mechanisms available to prevent double taxation generally require consultation at the government level, which is a slow and costly process and is not guaranteed to succeed in preventing double taxation.

In addition to transfer tax legislation, Levin also said the Senate needs to act first on a plan to extend the 2001 and 2003 tax cuts, but the outlook for getting a bill done remains uncertain. The debate on repealing the tax cuts for the upper 2% of taxpayers is repeated daily on our televisions.

Finally, Levin also said it is essential for Congress to take action on the estate tax before the end of the year and blamed Republicans for blocking progress on the legislation. "For Republicans to use their votes to essentially stalemate action, I think has led to a lot of turbulence," Levin said. "They talk about uncertainty, they are creating the uncertainty."

Levin Expects Transfer Pricing Bill

Against this background, Sander Levin (D-Mich.), House Ways & Means Committee Chair, stated on October 7, that he expects to bring transfer pricing legislation to the House floor during the lame duck session of Congress in an attempt to prevent improper tax avoidance strategies employed by multinational companies in this area. The perception shared by many Democrat members is that the current rules are difficult to enforce and encourages the movement of jobs overseas, i.e., by shifting jobs and economic payments to lower tax jurisdictions. . So the target is outsourcing of jobs. Previously, President Obama had two transfer pricing provisions in his fiscal year 2011 budget proposal pertaining to the taxation of "excess returns" from transfers of intangibles outside of the U.S. and by limiting the shifting of income through intangible property transfers. There are other proposals in this area suggested by Representative Lloyd Doggett (D-Texas), per H.R. 5328, which would required companies take into account certain U.S. intangibles income under Subpart F. Doggett’s approach would attempt to block certain income shifting strategies in general. On the other side of Congress, the Republicans have argued, somewhat persuasively, that in order to attract capital and jobs in the U.S., Congress should lower the corporate tax rates. The U.S. has the second highest corporate tax rate among our tax treaty partners. Previously, the Bush Administration had recommended a reduction in the maximum U.S. corporate tax rate to 25%. Perhaps the proper approach for Congress to take may be the broaden the base as the Democrats are contending while adopting the lower tax rate that Republicans want. Agreement on both sides in a compromise of that type would indeed be welcome.