Joint Committee On Taxation: Present Law And Background Related To Possible Income Shifting And Transfer Pricing

July 23rd, 2010

A report prepared by the staff the of the Joint Committee on Taxation for a public hearing held on 22 July 2010 before the House Committee on Ways and Means includes six case studies of unnamed companies that reported effective tax rates at least 10 percentage points lower than the U.S. statutory rate. The companies also had large discrepancies between the countries in which they reported sales and earnings, respectively.

The House Committee on Ways and Means has scheduled a public hearing on transfer pricing issues on July 22, 2010. This document,1 prepared by the staff of the Joint Committee on Taxation and submitted to the House Committee on Ways and Means, includes a background discussion of business restructuring, a description of past and present law relevant to the studies, and six case studies of U.S.-based multinational  corporations and how the business structure of those corporations interacts with the Internal Revenue Code to determine the corporation’s U.S. tax liability.

As summarized below, some studies suggest that multinational enterprises (both U.S.- based and foreign-based) may be able to shift income to low-tax jurisdictions, suggesting deficiencies in the application of transfer-pricing rules. While perhaps suggestive, these studies do not identify the mechanisms by which income shifting might occur. The majority staff of the House Committee on Ways and Means inquired of the staff of the Joint Committee on Taxation (“Joint Committee staff”) whether case studies might be developed, perhaps relying on public information, to identify business structures that facilitate possible income shifting or deficiencies in the application of transfer-pricing rules.

The Joint Committee staff concluded that public information alone would prove insufficient, but that a review of public and private documents for specific taxpayers might help explain how the interaction between business operations and tax planning could result in low reported average U.S. and worldwide tax rates by some taxpayers. The Joint Committee staff selected six U.S.-based multinational corporations to study, in part, on the basis of reports to their shareholders that each of the corporations had an effective (i.e., average) tax rate on worldwide income of less than 25 percent during at least one multi-year period since 1999. The six case studies do not represent a random selection of U.S.-based multinational corporations. The Joint Committee staff’s discussion of issues is based upon the facts as reported and is not a commentary on the correctness of any specific position taken by the taxpayer. The Joint Committee staff does not view the case studies as an investigation of the tax position of any specific taxpayer, but rather views the case studies as facilitating the identification and discussion of business structures that may affect a taxpayer’s U.S. and worldwide tax liability.

Download the report here

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