The report in Tax Notes, flagship publication of the nonprofit Tax Analysts, comes on the heels of earlier reports in the magazine this year showing that effective tax rates for U.S.corporations also have fallen in recent years. That drop in effective rates, the magazine found, is due largely to three factors: (1) average foreign effective tax rates have dropped, (2) U.S.multinationals have increased their foreign business activity, and (3) the profits of foreign operations have increased markedly.
In this week's report, "U.S. Multinationals Shifting Profits Out of the United States," Tax Analysts contributing editor Martin A. Sullivan found that corporate tax revenues dropped by $17.4 billion in 2004, the last year for which comprehensive data are available, compared to 1999.
This finding, Sullivan writes, indicates "the IRS is losing its battle to rein in aggressive transfer pricing abuse" — the abuse of U.S. tax rules for allocating assets, goods, and services among foreign and domestic operations, which allows companies to shift profits to lower-tax jurisdictions and pay tax accordingly.
On the upside, he writes, "there are large potential revenue gains if the United States were to tighten its current arm's-length transfer pricing rules or adopt an entirely new framework, such as a formulary apportionment, which is used by U.S.states and is now under consideration by the European Commission."
To read Sullivan’s article, go to the Tax Analysts home page. To interview Martin Sullivan, e-mail Wendy Lewis or call 703 533-4404.
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