Corporations Use $20 Billion Legal Tax Loophole

[sabra]

Source: ABC News

Experts Say Transfer Pricing, Which Is Perfectly Legal, Costs the Treasury Over $20 Billion a Year

As the economy threatens to fall into a recession and an increasing number of Americans are struggling to make ends meet, many corporations are drastically reducing their tax liability to the federal government through a perfectly legal practice known as transfer pricing, costing the Treasury more than $20 billion a year.

"Large corporations don't hide income, but they might engage in very sophisticated transactions that reduce their tax liability in ways that aren't appropriate," said Eric Toder, a senior fellow at the Urban Institute who focuses on taxes and retirement.

One such loophole that corporations are likely exploiting, says Toder, is transfer pricing, or prices charged for items or services within groups of the same company. Multinational companies commonly sell assets to overseas subsidiaries in low-tax countries to reduce taxable profits in the United States and increase them in the countries with lower tax rates. For tax purposes, these groups are all treated as separate companies.

"If a U.S. firm is purchasing a product from their foreign subsidiary, then they've moved potential U.S. profit to their offshore subsidiary," said Mike Brostek of the Government Accountability Office.

The GAO released a report just last week revealing that three percent of large US corporations  defined as having more than $50 million in gross receipts or $250 million in assets  paid no tax to the federal government for all eight years analyzed, raising, but not answering questions on how these corporations are legally evading Uncle Sam. While the report briefly alluded to a transfer pricing problem existing, it did not elaborate on the subject or specify which firms might be engaging in the practice.

Read more: http://abcnews.go.com/Blotter/story?id=5601895&page=1

[Arctic Dave]

1. The large multi-national corp I used to work for

does this exact thing. If they were to close this loop hole, we, the US, would be a much more fiscally sound nation. Now, do we have the political muscle to change this, that is the real question.

[melm00se]

4. "much more fiscally sound nation"?

$20 billion in revenue is less than 1% of the total federal budget ($2.7 trillion) and/or total tax receipts $2.6 trillion).

how would that make the country a more fiscally sound nation?

if this were a $200 billion loophole you might have a point.

[Arctic Dave]

5. This is only one of the many loopholes corps. employ.

Plus 20B IS a lot of money. 20B here, 20B there, you start talking a lot of loose change in the couch cushions. If the US Treasury has that money then it doesn't have to gouge it from the citizens. As for the Federal Budget, that is a totally other monstrosity.

[melm00se]

6. yes

$20B is a lot of money but to the fed (in context) $20billion is akin to you having $1.01 in your pocket instead of $1. not a whole lot of impact.

By all means, close the loophole...with the full understanding of the overall impact.

[unblock]

7. i suspect that $20bn vastly underestimates the problem

and it's far from the only technique used to reduce u.s. taxes.

[patriotvoice]

2. Meanwhile we "small US corporations" are taxed to death.

It's more interesting to watch this compilation than read more news about bastard large corporations.

[AlphaCentauri]

3. I was wondering where all those tax checks were

[unblock]

8. if i recall correctly, the transfer prices must be "market" or "arms-length" prices to be legal

i'm no lawyer, let alone an tax lawyer, but i'm pretty sure that at least they can't just charge a foreign subsidiary $1 for a $1,000 item in order to transfer profit to the foreign sub.

of course, there's still a fair amount of leeway in figuring out what's a fair price, and then of course any prosecutor who wanted to nail an offending corporation would have the burden to prove that the pricing was indeed NOT market pricing.