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View Diary: Neofeudalism: Corporate Money Laundering--Updated w/ Poll (26 comments)

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  •  Not so simple (1+ / 0-)
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    Let's take it step by step.

    If DS Inc. buys widgets from D5616 Inc. for $1,000 and sells them for $2,000 and our other costs are $300 then our profits are $700 and we pay tax on that.  All fine and dandy and simple.  Does anyone disagree?

    If D5616 Inc. is in China instead of the US should that change anything?  Obviously not.

    What about if DS Inc. and D5616 Inc. are both owned by DK Inc.?  Well, can't see how that makes a difference.  It's still the same transactions, right?

    Well, problem is how did DS Inc. and D5616 Inc. decide on US$1,000 as a transfer price?  This is no longer an arm's length transaction.

    Transfer pricing is obviously necessary and there is absolutely nothing wrong with it.  The problem is determining what the fair transfer prices are since companies obviously want to buy for high prices when they move goods from low tax to high tax jurisdictions and the reverse when they do the reverse.

    That's where audits come in but that still doesn't solve the problem because pricing for many products and inputs is very unclear.

    If you're selling oil between companies just use the commodity price on the open market.  If you're selling a kitted product for local assembly you can usually calculate a price based on cost of inputs.

    But how do you price a patent right?  Or a software license for a tool that you don't sell on the open market?

    If you've got a good answer for this rather than just yelling about evil tax evasion I'd like to hear about it.

    •  You have described the problem accurately. (0+ / 0-)

      I don't have the answer. But that doesn't mean it's not a problem that needs to be brought to people's attention.

      As for solutions, the article says of Dorgan:

      He favors scrapping the rules in favor of a system that allocates profits as most U.S. states with a corporate income tax do. That method is based on factors including sales, number of employees and property in a particular state.

      Sounds better to me but I am not a corporate tax expert. I do know that, as the article stated, companies are getting "more aggressive" in implementing the transfer pricing strategy, and that it is not fair for these companies to take US wealth and not pay US taxes on it.

      I love Republicans--especially flame-broiled.

      by Dragon5616 on Sun May 16, 2010 at 02:34:05 PM PDT

      [ Parent ]

      •  Doesn't make any sense to me (1+ / 0-)
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        For example, how would you handle transfer pricing on software?

        A distribution company may have far more people than the owner of the IP but may give 30% to 50% of list price to the publisher as a royalty.

        •  asdf (0+ / 0-)

          For example, how would you handle transfer pricing on software?

          I wouldn't. I'd let the president and the congress do that since I am not a corporate (or any other kind) of tax expert.

          I love Republicans--especially flame-broiled.

          by Dragon5616 on Sun May 16, 2010 at 06:37:15 PM PDT

          [ Parent ]

        •  Not simple ... but addressable (0+ / 0-)

          Dear Dismalest,
          I think two phenomena are being discussed here: 1) transfer mispricing per se, which involves using a controlled entity in a tax haven as an intermediary in the sale of goods and services. Since these are generally tradable items on the market, there is little problem (conceptually) in dealing with them. What is generally lacking are the resources and the will.

          1. the other issue, which you raise, involves intercorporate transfers-- that is, of goods or services, etc.--between a corporation and a subsidiary in a tax haven. For example, ABC Corporation "sells" its trademarks and patents to its subsidiary in the Caymans, then pays large sums in royalties each year for their use to the (untaxed) subsidiary.

          I suspect that it's actually not that hard to estimate a fair market value for such transfers. Otherwise, ABC could make $2 billion a year, and then "pay" ABC Caymans $2 billion for use of the intellectual property. Typically, however, companies do not cut quite so sharp a corner, which suggests that the IRS has standards that allow a certain amount of fudging but not an enormous amount.

          In both cases, such transfers are particularly a problem for Third World/small countries that do not have the government resources for surveillance of corporate shenanigans. A quick goggling of "transfer mispricing" brings up a list of interesting reports by a variety of government and international bodies and nonprofits on the problem and how to address it.

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