Tax Enforcers Intensify Focus on Multinationals [Transfer Pricing]

(New York Times – Matthew Saltmarsh)

While the recession may be ending across much of the world, its effect on revenue collectors and corporate tax returns will last much longer. Tax inspectors had already been increasing their focus on multinational businesses, specifically taking aim at an arcane area of international accounting called transfer pricing. Such scrutiny is intensifying, according to tax experts, as governments seek ways to close their growing budget deficits.

The potential for friction was emerging before the financial crisis, and “the current recession has increased that potential dramatically,” according to a recent paper by the auditing firm Grant Thornton.

Companies like Microsoft and Google have long pushed their effective tax rates down by moving functions to lower-rate jurisdictions like Ireland, which has a low tax rate on royalty income – as low as zero – and a 12.5% corporate tax rate, against the 35% rate in the United States.

Transfer pricing involves calculating how much profit is made by a company in each country in which it operates, when contributions to the final product – be it parts, patent rights, services or funds – may come from one or more affiliates abroad.

A report from the charity Christian Aid, which is concerned with the effect on developing countries, estimated that governments lose $160 billion a year when companies working across borders misapply the rules. Read more here.