Multinational companies should be made to pay taxes on foreign profits.
Newspapers use the phrase “transfer pricing” as shorthand for multinational corporations shifting profits to tax havens to avoid tax in developed countries.
Tax professionals bristle at this characterization, arguing that transfer pricing is a neutral phrase to describe the process by which profits are allocated among different jurisdictions as though corporate affiliates were separate economic actors transacting with each other at arm’s length.
The newspapers are correct. The members of large multinational groups of corporations are not separate economic actors. The point of vertical integration is not to have to pay arm’s-length prices for some goods and services. It is a fool’s errand to try to divine arm’s-length prices for intragroup transactions, particularly for valuable intellectual property (IP) that is never licensed to outsiders.
Financial accounting ignores affiliates and treats the corporate group as a single entity. But the federal income tax law treats affiliates as separate economic acdtors, giving multinationals free rein to determine where their profits should be taxed, or more likely, not taxed.
Multinationals report vast profits in tax havens like the Cayman Islands, Luxembourg, Switzerland and Ireland. Economists have documented massive shifts of multinational corporations’ profits to tax havens, in amounts wildly out of proportion to any economic activity taking place there. Some income is not taxed anywhere. Americans call it “nowhere income.” Europeans call it “white income.”http://www.forbes.com/2010/06/24/tax-fin…