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View Diary: U.S. Trade Deficit Largely Due to "Intra-Firm" Trade (59 comments)

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  •  Subsidiary Must Exist In the US (1+ / 0-)
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    Pete Cortez

    You don't collect taxes from the parent organization HQd in the foreign country.  You collect income taxes from that enterprise's subsidiary organized and located in the US.  That's why the income taxes apply to only the income generated in the US.  If the foreign corporation is exporting to a third-party (say an independent importer or an agent) then the foreign exporter will be liable for no tax at all.  They would likely draft their sales agreements so that the title to goods transfers on the deck of the ship or vehicle transporting the goods anyway so that any goods which might be deemed under their control are always effectively outside the US.

    The issue of commodity pricing arises because a taxing agency can develop an idea of what the price should be for a good if it trades essentially as a commodity on the global market.  If the good trades as a highly engineered or designed item, it becomes much more difficult to establish a level of equivalency.  For example, if the foreign firm imports a quantity of wheat, an internationally recognized bourse exists which sets prices for wheat daily.  Therefore, the exporter can't set a price for the good much different than what it is trading for on the commodity market.  If the good is highly engineered, who knows what the value of the good might be when it comes into the US.  We know what it might sell for wholesale or retail as it trades hands in the distribution chain, but we don't know what the dockside delivered price should be.  The actual manufacturing cost will be a closely held secret by the producer, so no one really knows the price.  In this case, if the seller has tight control over the distribution, they know what the market price can be and what the distribution and marketing costs can be to clear the market.  Then, they need only back out those costs to arrive at what they claim to be the transfer price from their facility off-shore.  In this circumstance, how can the IRS dispute their claim.  They would have no equivalent item offering a similar price because both are so highly engineered.  Any good marketer could easily develop a rationale for why the transfer price is valid.

    "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

    by PrahaPartizan on Fri Aug 10, 2012 at 03:55:49 PM PDT

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