Christopher E. Bergin is the president and publisher of Tax Analysts and a former editor of Tax Notes.
In this article, Bergin comments on the recent report from the OECD on base erosion and profit shifting, referred to as the BEPS report. He looks back to the battle over abusive corporate tax shelters in the 1990s and speculates whether the BEPS report signals a new battle over the corporate income tax -- one that involves abusive transfer pricing and other techniques used aggressively by some multinational corporations and their advisers to avoid as much tax as possible.
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A few weeks ago I blogged on the Tax Analysts website about the corporate tax shelter scandals of the 1990s. I was moved to do so by two announcements: one regarding yet another accounting firm paying millions of dollars for its involvement in abusive corporate tax shelters, and the other about a tax lawyer sentenced to eight years in prison for her involvement in abusive corporate tax shelters. The sad fallout from the '90s continues.
My point was simple: A whole new generation of tax lawyers should learn from what happened. I'm a lawyer, and I'm extremely proud of my profession. Most of my friends are lawyers, many of them tax lawyers. Watching a few tax professionals abuse a system they should have been guarding by designing and promoting shelter products for a few bucks (well, maybe more than a few) was deeply disturbing. I got no pleasure from covering what was happening and knowing that sooner or later, the clown would spring from the box.
Despite the carnage, we won the shelter war, right? We did win the battle. The war? I'm not so sure. To stick with bad metaphors, maybe the '90s were the Dark Ages and we have now entered the Renaissance. Today, some can abuse the system and avoid paying about as much corporate tax as they want, and nobody will go to jail. That's because it's all legal. Just think of where we are. Abusive transfer pricing: legal. Abusive cost sharing: legal. Income stripping: legal. The cockamamie U.S. check-the-box rules: legal. Aren't these modern times just great?
In the '90s, abusive tax shelters undercut the system. Today, abusive transfer pricing is the system. Oh yeah, there's the lockout effect that forces multinationals to keep tons of money outside the country. But that's only until they convince Congress to declare another repatriation holiday, letting them return their overseas profits at an absurdly low tax rate. It makes you wonder why we have an income tax for multinationals in the first place. Here's why: It keeps a lot of us tax lawyers employed. (It calls to mind the scene in Blazing Saddles in which Mel Brooks tells his crooked cabinet: "We've gotta protect our phony baloney jobs, gentlemen!")
But sooner or later, I think this golden age of manipulation will crash, too. That it's legal doesn't make it right.
Take the art of transfer pricing. And it is art. Brilliant professionals work with huge multinational conglomerates to manipulate intragroup pricing to shift taxable income to low-tax jurisdictions while shifting deductions to high-tax jurisdictions. And the conglomerates and their advisers get a secret get-out-of-jail-free card, called an advance pricing agreement, courtesy of the government. What a brilliant scheme. (I use "scheme" advisedly because that word seems to offend some people.)
To me, the APA is an obscenity in the tax code. What else would I think? I work for Tax Analysts. But seriously, what else would you call a multinational corporate taxpayer's ability to secretly set tax rates with the U.S. government? All you have to do is pay your lawyers, which is cheaper than paying your taxes. And it's all legal. At least we got the tax system back to where nobody gets hurt -- except for the chumps who actually pay their taxes.
Can the Golden Age Last?
It isn't perfect for everyone, however. Not everyone gets to play the game; not every U.S. company can be involved in the economic life of another country without having a presence there. Not every company gets to join the transfer pricing club.
Global trade between related parties is growing, and growing with it is the problem of multinational corporations literally dictating what they pay in taxes. Further, some countries in the global market, like India, think things are backward -- that industry groups shouldn't get to dictate what they pay in taxes but that instead, the countries should dictate to the multinationals. This latter point may have something to do with a recent report from the OECD titled "Addressing Base Erosion and Profit Shifting," or BEPS. We'll be hearing lots about BEPS.
It's an astonishing report, especially when you consider that for years, the OECD has been the referee -- some would say the industry enabler -- of multinational corporate tax avoidance, including transfer pricing and other rules. (The BEPS report covers much more than transfer pricing.) Not every global economic player is a member of the OECD, of course, and some non-OECD members are getting fed up with how the OECD officiates the game. Maybe that forced the OECD's hand.
Also, OECD member countries that are strapped for cash may be pushing the organization to consider sound tax policy over tax haven promotion. The 800-pound gorilla in the room, of course, is the United States, which has amply demonstrated that it can and will shove the OECD around.
The OECD itself is indicating that the BEPS report may be a game changer, saying, "What is at stake is the integrity of the corporate income tax." That's quite a statement, and it's about time. Among other things, the report recognizes that something is broken in the transfer pricing area. That the OECD, which is not exactly renowned for its courage in setting transfer pricing rules, would say such a thing may be game-changing in and of itself.
Then there's the reaction of some members of the tax profession who are clearly disturbed by the report. They complain about insinuations that intangibles aren't real or substantial. Well, aren't they? Those critics are disturbed that the report frequently uses the word "scheme," which they say is not a nice word (a scheme can be a plan or program of action, or it can be an underhanded plot -- you pick). Sensitivity to particular words is often telling. Back in the Dark Ages, many of us knew that something was wrong when the purveyors of abusive shelters started complaining about the shabby treatment they were getting in Tax Notes.
Transfer pricing aficionados already have a real problem because the mainstream media is pressing multinationals that manipulate the system to pay a paltry amount of tax. The press loves a good villain. Once the CEOs of multinational corporations start seeing their names above the fold in Page 1 stories about tax cheating -- whether that cheating was legally sanctioned or not -- their lawyers and other stakeholders won't be able to help them (think Starbucks in the United Kingdom).
So maybe the war against corporate income tax abuse isn't over. Maybe we've moved from the blunt weapons of the Dark Ages to the precision-guided missiles, such as BEPS, of our new Renaissance. If so, it will be another nasty fight, and one not easily won. The multinationals are powerful. That's why the OECD and U.S. government have capitulated to them in the past.
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