Tax Evaders: Multinationals are Selling the Country Short

[one...two...tree 2,762]

The biggest tax scam on earth has a very innocent sounding name. It is called "transfer prices." That almost sounds boring. It is, however, anything but boring. Abuse of transfer prices is a key tool multinational corporations use to fool the U.S. and other jurisdictions to think that they have virtually no profit; hence, they shouldn't pay any taxes.

Corporations involved in this scam are "model corporate citizens," or so they would like us to believe. The truth is that they rob us all blind. The money we lose can be estimated in the tens of billions, or possibly hundreds of billions of dollars every year. We all end up paying higher taxes because rich corporations make sure they don't.

But don't take my word for this.

A few weeks ago U.K.-based GlaxoSmithKline (GSK), one of the largest pharmaceutical companies in the world, together with the Internal Revenue Service (IRS) announced that GSK will pay $3.4 billion to the IRS to settle a transfer pricing dispute dating back 17 years. The IRS alleges that GSK improperly shifted profits from their U.S. to the U.K. entity.

And U.K. pharmaceutical companies are not alone with these kinds of problems. Merck, one of the largest U.S. drug companies, also this month disclosed that they face four separate tax disputes in the U.S. and Canada with potential liabilities of $5.6 billion. Out of that amount, Merck disclosed that the Canada Revenue Agency issued the company a notice for $1.8 billion in back taxes and interest "related to certain inter-company pricing matters."

And according to the IRS, one of the schemes Merck used to cheat American tax payers was by setting up a subsidiary in tax-friendly Bermuda. Merck then quietly transferred patents for several blockbuster drugs to the new subsidiary and then paid the subsidiary for use of the patents. The arrangement in effect allowed some of the profits to disappear into Merck's own "Bermuda triangle."

So what's going on here, how have multinational drug companies been able to gouge us for years selling expensive drugs and then avoid paying tax on their astronomical profits?

The answer is simple. For companies in certain businesses, such as pharmaceuticals, it is very easy to simply "invent" the price a company charges their U.S.business for buying the company's product which they manufacture in another country. And if they charge enough, poof; all the profit vanishes from the US, or Canada, or any other regular jurisdiction and end up in a corporate tax-haven. And that means American and Canadian tax payers don't get their fair share.

Many multinational corporations essentially have two sets of bookkeeping. One set, with artificially inflated transfer prices is what they use to prepare local tax returns, and show auditors in high-tax jurisdictions, and another set of books, in which management can see the true profit and lost statement, based on real cost of goods, are used for the executives to determine the actual performance of their various operations.

Of course, not every multinational industry can do this as easily as the drug industry. It would be difficult to motivate $6,000 toilet seats. But the drug industry, where real cost of goods to manufacture drugs is usually around 5 percent of selling price, has a lot of room to artificially increase that cost of goods to 50 percent or 75 percent of selling price.

This money is then accumulated in corporate tax-havens where the drugs are manufactured, such as Puerto Rico and Ireland.Puerto Rico has for many years attracted lots of pharmaceutical plants and Ireland is the new destination for such facilities, not because of the skilled labor or the beautiful scenery or the great beer -- but because of the low taxes. Ireland has, in fact, one of the world's lowest corporate tax rates with a maximum rate of 12.5 percent.

In Puerto Rico, over a quarter of the country's gross domestic product already comes from pharmaceutical manufacturing. That shouldn't be surprising. According to the U.S. Federal Tax Reform Act of 1976, manufacturers are permitted to repatriate profits from Puerto Rico to the U.S. free of U.S. federal taxes. And by the way, the Puerto Rico withholding tax is only 10 percent.

Of course, no company should have to pay more tax than they are legally obligated to, and they are entitled to locate to any low-tax jurisdiction. The problem starts when they use fraudulent transfer pricing and other tricks to artificially shift their income from the U.S. to a tax-haven. According to current OECD guidelines transfer prices should be based upon the arm's length principle - that means the transfer price should be the same as if the two companies involved were indeed two independents, not part of the same corporate structure. Reality is that standard operating procedure for multinationals is to consistently violate this rule. And why shouldn't they? After all, it takes 17 years for them to pay up, per the GSK example above, even when they get caught.

Another industry which successfully exploits overseas tax strategies to cheat us all is the hi-tech industry. In fact, Microsoft Corp. recently shaved at least $500 million from its annual tax bill using a similar strategy to the one the drug industry has used for so many years. Microsoft has set up a subsidiary inIreland, called Round Island One Ltd. This company pays more than $300 million in taxes to this small island country with only 4 million inhabitants, and most of this comes from licensing fees for copyrighted software, originally developed in the U.S. Interesting thing is, at the same time, Round Island paid a total of just under $17 million in taxes to about 20 other countries, with more than 300 million people. The result of this was that Microsoft's world-wide tax rate plunged to 26 percent in 2004, from 33 percent the year before. Almost half of the drop was due to "foreign earnings taxed at lower rates," according to a Microsoft financial filing. And this is how Microsoft has radically reduced its corporate taxes in much of Europe and been able to shield billions of dollars from U.S. taxation.

But remember, this is only one example. Most of the other tech companies are doing the same thing. Google recently also set up an Irish operation that the firm credited in a SEC filing with reducing its tax rate.

Here's how this is done in the software industry and any other industry with valuable intellectual property. A company takes a great, patented, American product and then develops a new generation. Then, of course, the old product disappears. Some, or all, of the cost and development work for the new product takes place in Ireland, or at least, so the company claims. The ownership of the new generation product and all income from licensing can then legally be shared between the U.S. parent company and the offshore corporation or transferred outright to the tax-haven. The deal, to pass IRS scrutiny, has to be made using the "arms-length principle." Reality is that the IRS has no way of controlling all these transactions.

Unfortunately those of us working and paying tax in the U.S. can't relocate our jobs and our income to Ireland or another tax haven. So we have to make up the income shortfall. In the U.S. we have a highly educated society with a very qualified workforce, partly supported by our tax payers. This helps us generate breakthrough products. But once a company has a successful product, they have every incentive to move the second generation of a successful product overseas, to Ireland and a few other corporate tax havens.

There is only one problem for U.S. companies with this strategy, and that is that if they repatriate this money to the U.S. they have to pay full corporate taxes. In fact, according to BusinessWeek, U.S. multinational corporations have built up profits of as much as $750 billion overseas, much of it in tax havens such as the Ireland, Bahamas, and Singapore to avoid the stiff 35 percent levy they'd face if they repatriated the funds back into the U.S. But of course, Congress, which is basically paid for by our multinational corporations, generously provided for a one-time provision in the corporate tax code, so that they could repatriate profits earned before 2003, and held in foreign subsidiaries, at an effective 5.25 percent tax rate.

And so the game goes on.

In the end, multinational corporations live in a global world which allows them to pretty much send their money to corporate tax havens at will, and then repatriate this money almost tax free, with the help of the U.S. Congress.

The people left holding the bag are you and me.

Peter Rost, M.D., is a former Vice President of Pfizer. He became well known in 2004 when he emerged as the first drug company executive to speak out in favor of reimportation of drugs. He is the author of "The Whistleblower, Confessions of a Healthcare Hitman."

[Heracles 417]

I wonder what the Democrats will do to solve this? Are they not the group responsible for closing such loopholes now?

[one...two...tree 2,762]

I wonder what the Democrats will do to solve this? Are they not the group responsible for closing such loopholes now?

Unfortunately both parties have been way too cozy with corporations in the past and until we can get rid of the lobbyists in Washington, they'll keep having their way to more or lesser degree.

[mawilson 2,133]

A few weeks ago U.K.-based GlaxoSmithKline (GSK), one of the largest pharmaceutical companies in the world, together with the Internal Revenue Service (IRS) announced that GSK will pay $3.4 billion to the IRS to settle a transfer pricing dispute dating back 17 years. The IRS alleges that GSK improperly shifted profits from their U.S. to the U.K. entity.

Doesn't it mean they would have to pay taxes in the UK instead? What's the advantage of doing that then?

[sheraz 0]

So the company uses a loop hole to evade taxes. That is not not illegal. The company profits eventually wind up in our 401ks etc. So the net effect is that that the tax payers rarely loose.

The simple issue is that of consumers. Consumers want to fork out money for everything from motorola phones to LCD screens to every high tech product their is. Is their a real need for a razr phone or a plasma TV. So what should the company do. With China and India able to reverse engineer anything a US company can invent, companies need tax havens to make some money off second generation products.

If the taxation rates were increased, it would increase the cost of goods that are produced and shareholders loose value. Net effect of this higher tax rate is less saving now as the goods will be more expensive and less savings in tax deffered accounts for retirement.

[one...two...tree 2,762]

So the company uses a loop hole to evade taxes. That is not not illegal. The company profits eventually wind up in our 401ks etc. So the net effect is that that the tax payers rarely loose.

The simple issue is that of consumers. Consumers want to fork out money for everything from motorola phones to LCD screens to every high tech product their is. Is their a real need for a razr phone or a plasma TV. So what should the company do. With China and India able to reverse engineer anything a US company can invent, companies need tax havens to make some money off second generation products.

If the taxation rates were increased, it would increase the cost of goods that are produced and shareholders loose value. Net effect of this higher tax rate is less saving now as the goods will be more expensive and less savings in tax deffered accounts for retirement.

Many multinational corporations essentially have two sets of bookkeeping. One set, with artificially inflated transfer prices is what they use to prepare local tax returns, and show auditors in high-tax jurisdictions, and another set of books, in which management can see the true profit and lost statement, based on real cost of goods, are used for the executives to determine the actual performance of their various operations.

...and you're ok with that?

[Nikita2Charles 32]

I second that!

I can talk about this on a personal level as I have seen it happening through 2 companies.

Right now the company is setting up manufacturing plant in Singapore,

The excuse: most of our customers are in Asia as such it's better to build the system closer to where they are.

Singapore is the Main targe

The singapore govt is giving big tax cut to the US corporation as long as they set up a number of jobs in Singapore for a period of time.

The singapore govt PAYS the salary of their citizens through a reimbursement program, where the company get refunded the salary they pay for their guys when they are in the USA

Basicall singapore guys comes here in California for training, Singapore govt pay for the training

So as long as they are here, The company is not paying their salary in US and in SINGAPORE.

So comes revenues time in the future, once the product is sold and ship from overseas, The US companies can avoid paying taxes to the IRS while they have major tax break in Singapore.

Inpact on the US economy

Thousands of people will loose their Jobs, Less tax $$$$$$$ going to the IRS, while the middle class is being squeeze left and right, Those big corporation are getting away without paying their fare share.

Short term yes maybe beneficial but in the long run it will only ruin america, You would think High TECH corporate america learned the lessons of FORD, GM, they outsourced their car technology. The Japanese learned from the american mistakes, make the product better, they had some snafu getting there, but now they can command higher prices for their cars while the American Car makers are strugling.

[peejay 327]

Shenanegans by my US Senator John Cornyn in this Lame Duck session of Congress. Do these a$$holes work for us? Is the Pope Jewish???

By the time you wake up later this morning and read this, Sen. Cornyn (R-TX) will be well on his way to ramming through a bill to radically increase foreign workers in the tech, nursing, physical therapy, science and engineering fields.

Believe me, the only way to defeat this last-minute desperation attempt by Robber Baron Tech Corporations to keep wages low is if Senate offices are stunned today by the public outcry against this disreputable maneuver.

A swarm of Microsoft lobbyists -- surely reeking of the musty odor of giant wads of campaign contributions -- buzzed and stang their way through Senate offices Wednesday, demanding that they and others of their ilk be given hundreds of thousands more foreign workers next year.

Will you let them once again get their way at the very last minute of a Congress?

PHONE THESE CONGRESSIONAL LEADERS NOW

Senate Majority Republican Leaders

Sen. Frist (R-TN)

Sen. McConnell (R-KY)

Sen. Santorum (R-PA)

Sen. Kyl (R-AZ)

Sen. Lott (R-MS)

Senate Minority Democratic Leaders

Sen. Reid (D-NV)

Sen. Durbin (D-IL)

Sen. Dodd (D-CT)

House Majority Republican Leaders

Rep. Hastert (R-IL)

Rep. Boehner (R-OH)

Rep. Blunt (R-MO)

Rep. Cantor (R-VA)

House Minority Democratic Leaders

Rep. Pelosi (D-CA)

Rep. Hoyer (D-MD)

Rep. Emmanuel (D-IL)

Tell Senate leaders to not let Cornyn's bill come up on the floor for any kind of discussion.

Tell House leaders to inform Senate leaders that they will NOT bring the bill up if the Senate passes it.

A KEY FACT FOR YOUR CALL

The United States has lost 700,000 high-tech American jobs in the past 4 years.

The country is awash in American tech workers who are now unemployed or working outside their field. While the tech lobbyists claim the companies face a labor shortage and won't be able to keep providing benefits to the economy without more foreign labor, there are plenty of skilled Americans available.

Same thing goes for nurses and physical therapists. Offer better pay for nursing and underemployed nurses will come out of the woodwork.

Each year, thousands of American students who qualify can't get into Physical Therapy schools because the schools feel no pressure to expand their enrollment while such a large percentage of physical therapy jobs are being filled by foreign therapists.

The message to Congress must be that it should NOT foreclose the future for our own American students who are seeking jobs in these fields.

The Short Story of Sen. Cornyn's Perfidy Against American Skilled Workers

Americans had been assured that the clock had already run out on this kind of sneak-pass play. Congress was supposed to be in town this week just to pass a Continuing Resolution to keep the federal government funded.

But tech industry lobbyists -- desperate to continue to hold down wages with foreign labor -- have stopped the legislative clock.

A near-football team of Microsoft blockers, tackles and fleet-footed lobbyists (10 of them!) roamed the Senate hallways Wednesday looking for a way score on their usual last-minute, rule-breaking, end-of-Congress style.

Many times in recent years, Microsoft and other tech lobbyists have sneaked through major increases in H-1B visas just as Congress was leaving town.

Since being publicly embarrassed in the late 1990s by debating the merits of this kind of legislation publicly, Congress has declined to pass these H-1B visa increases in the true light of day, with standard debate and using normal procedures.

But nearly all inside staffers told us they had received assurances from congressional leaders that no sneak play would be allowed this year.

On Tuesday, Senate staffers were stunned to see Sen. Cornyn suddenly emerge as the person willing to bring shame on himself by carrying the Robber Barons' water and force his pet project ahead of all others.

We sent an email to all our members last Friday, asking for steady pressure on Senators to make sure they knew public sentiment in case something like this happened.

Then Tuesday afternoon, we got word that Cornyn was trying to ram his bill onto the Senate floor. We went to all of our members in about a dozen states with Senators who often fight for American workers against foreign labor importation. We stirred up a flurry of phone calls.

We were pleased that by late Tuesday, many of those Senators had placed "holds" on Cornyn's bill. But those holds tend to have power to only slow the process down for awhile and can be overcome if Senate leadership decides to do so. The word we had late Wednesday was that the "holds" were breaking as Microsoft's lobbyists gathered more support.

You are calling the congressional leaders just stop the bill from moving to the floor and to concentrate instead on spending bills.

MORE ARGUING POINTS

For me, the clincher in the debate is that the tech industry has resolutely fought any effort inside Congress to require that their solicitation of foreign workers be entirely public and transparent. If they truly need the workers, then they should not object to posting these jobs on a special internet website so that all Americans would first have the opportunity to apply for the jobs and then for that website to keep a record of each company that ends up hiring foreign workers, the number of workers for each company and a description of the job duties and pay for each. This would expose a lot of the fraud that currently is in the program. But the tech companies want nothing of that kind of good-faith behavior.