PDF of the Briefing Book - Tax Analysts

150 Pages·2008·2.41 MB·English

2008 Presidential election
Potential Issues Background Articles
By Martin A. Sullivan
Multinational Corporations
Individual Tax Evasion
& Offshore Tax Havens
Compliments of tttaaaxxxaaannnaaalllyyyssstttsss
CONTENTS (C
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5 Introduction ll righ
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Part 1: Multinational Corporations, Tax Avoidance & Offshore Jobs rv
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9 International Tax Planning: A Guide for Journalists ax
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14 The IRS Multibillion-Dollar Subsidy for Ireland aly
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18 Drug Firms Move Profits to Save Billions do
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21 High-Tech Companies’ Tax Rates Falling no
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25 The Effective Corporate Tax Rate Is Falling im
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28 Reported Corporate Effective Tax Rates Down Since Late 1990s py
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33 Why Reported Effective Corporate Tax Rates Are Falling t in
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42 U.S. Multinationals Shifting Profits Out of the United States y p
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48 U.S. Multinationals Paying Less Foreign Tax lic
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56 Offshore Jobs and Taxes: Will Democrats Attack? a
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58 U.S. Multinationals Moving Jobs to Low-Tax, Low-Wage Countries r th
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Part 2: Individual Tax Evasion in Offshore Tax Havens rty
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65 Offshore Account Reports Rising, but Compliance Remains Low ten
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66 Keeping Score on Offshore: U.K. 60,000, U.S. 1,300
70 Lessons From the Last War on Tax Havens
80 Tax Analysts Offshore Project
87 Offshore Explorations: Guernsey
103 Offshore Explorations: Jersey
114 Offshore Explorations: Isle of Man
125 Offshore Explorations: Switzerland
136 Offshore Explorations: Caribbean Hedge Funds, Part 1
148 Offshore Explorations: Caribbean Hedge Funds, Part 2
TaxAnalysts—BriefingBook 3
INTRODUCTION (C
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Tax policy is guaranteed to remain at center stage mated $345 billion a year that taxpayers owe but do se
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in Washington for years to come for a host of not pay. Then they will consider raising taxes on ‘‘the e
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reasons. rich.’’ But they will find that closing the tax gap is no . T
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easy matter and that there are not enough rich people x
For one thing, the tax code has become increasingly A
to solve the problems, even if Congress literally confis- n
complex, making it much harder for individuals and a
cated all the money of the rich. ly
businesses to understand. All that complexity is s
prompting calls in Congress and elsewhere for another At some point, a future president and Congress will ts d
round of tax reform — perhaps akin to the Tax Re- have to look elsewhere to generate more revenues. oe
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form Act of 1986, which cut individual and corporate They would be wise to consider the issues covered in n
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income tax rates and eliminated scores of deductions this briefing book — the tens of billions of dollars of t c
— or perhaps something more dramatic, like the cre- potential tax revenues that are lost because individuals laim
ation of a tax on consumption that would bring the and corporations find ingenious ways to transfer their c
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U.S. tax system more in line with those of many other assets, their investments, and their earnings to overseas py
industrialized nations. locations. rig
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For another thing, President Bush’s big tax cuts for We have been writing about these issues for some t in
time in the pages of Tax Notes and Tax Notes Interna- a
individuals from 2001 and 2003 are due to expire by n
2010, and Congress will have to consider whether to tional, two of our weekly magazines. The articles in y p
extend some or all of them. In addition, Congress con- tghoilsdcmolilnecetioofnpdoatetentbiaalckretvoen2u0e0s4.anWdhoaptptohretyunreitvieesaltois a ublic
tinues to make annual adjustments in the alternative d
improve the fairness of the tax system, although the o
minimum tax (AMT) to ensure that it does not raise m
federal government would have to become a lot more a
the taxes of tens of millions of middle-income house- in
hpeorlmdsa.nEevnetnlyt.ually, lawmakers will have to fix the AMT semeraraittoiinougns.wabiothutoethneforrccoinugnttrhieesntaotisohna’rsetiamxplaowrtsanatnidnfcooro-p- or third
babFyo-brosotimll agneontehreartitohninagn,dthtehecocmonintignurientigreemxpelnotsioofnthine On the individual side, the wealthy park their assets party
in offshore trusts and other structures. Many do not c
healthcare spending will send costs soaring for Social o
comply with federal reporting requirements on those n
Security, Medicare, and Medicaid. That, in turn, will te
assets. So, they can evade income, capital gains, and n
transform today’s troubling budget deficits into truly t.
estate taxes.
frightening deficits in the coming years. That’s true
On the corporate side, U.S. multinationals shift their
whether or not Congress extends the 2001 and 2003
operations, their profits, or both, to low-tax, low-wage
tax cuts.
countries. The federal government is losing its battle to
As Congress turns to these challenges, the search for stem the growing abuse of transfer pricing rules. As a
revenues will not be far behind. If Congress wants to result, corporate tax revenues as a percentage of profits
reform the tax code, lawmakers will need to offset the are falling.
costs of cutting tax rates. If Congress wants to extend
The next president and Congress will be strapped
the 2001 and 2003 tax cuts, fix the AMT, or close the
for revenues. As these articles make clear, the place to
budget gap, lawmakers will need more revenues, be-
look may be overseas. Whether Congress will enact
cause they cannot, or will not, cut spending enough to
new laws to tackle the issue, forcing wealthy individu-
fully offset the costs.
als and U.S. multinationals to pay more in federal
On the hunt for revenues, the nation’s leaders will taxes, is an open question. But we think a serious de-
turn first to what they consider ‘‘low-hanging fruit.’’ bate about offshore tax evasion and tax avoidance is
They will consider how to close the tax gap, the esti- almost inevitable. ✰
TaxAnalysts—BriefingBook 5
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Editor’s Note: The articles in this briefing book were written over the past several years. The information and data
set forth in each article is accurate as of the time of the original publication.
taxanalysts
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BrieFinG BooK a
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2008 Presidential election 08
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Potential Issues Background Articles ll rig
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By Martin A. Sullivan re
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Part 1: laim
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Multinational Corporations, Tax Avoidance & Offshore Jobs righ
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NEWS AND (C
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ANALYSIS aly
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ECONOMIC ANALYSIS It is a relatively straightforward task to assign geo- rv
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graphic location to profits attributable to manufacturing d. T
International Tax Planning: and selling. First, the amounts are easy to determine. a
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Manufacturing profit is estimated as a percentage A
A Guide for Journalists markup over cost (for example, 30 percent). Profit from naly
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selling is like a commission, estimated as a percentage ts
of the sales price (for example, 15 percent). Second, do
ByMartinA.Sullivan—[email protected] e
(Reprinted from Tax Notes, Oct. 4, 2004, p. 32.) the locations are easy to determine. Manufacturing s n
profit is generated where the factory is located. Selling ot c
profit flows from the location of product sales. When a la
This article is for nonexperts, such as most journal- im
ists, in search of a better understanding of interna- danisdpusteellianbgouartisthese,aitmisouunstuaolflyparobfoitutfrtohme pmeracneunftaacgteusr,ing cop
tional tax policy. It describes in a nontechnical way y
how a U.S.-headquartered multinational corporation and the difference of opinion usually involves a few righ
can reduce its taxes using current international tax percentage points. t in
rules. At the expense of precision and in the interest of The size and location of profits from patents, trade- any
simplicity, technical tax terms have been omitted. p
marks, and know-how is another story. Because by u
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Under international tax rules, there are two key pre- their nature they are unique, there is more art than sci- lic
requisites for making money for U.S. companies. First, ence involved in estimating their value and the profits do
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you must be able to shift profits out of the United they generate. Second, because they are concepts that a
States or another high-tax country to a tax haven. Sec- exist only on paper, their geographic location is prima- in o
ond, you must avoid complex, but porous, U.S. rules rily a legal matter — involving the shifting of paper r th
designed to prevent that by imposing tax on profits rather than infrastructure and jobs. ird
shifted to tax havens. p
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But first a word about multinational business. In most cases, particularly in rty c
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Slicing the Profits Pie the short term, the tax planner te
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is confined to devising ways to t.
All the complex business of a large corporation usu-
ally can be boiled down to three categories: (1) manu- shift profits without shifting
facturing, (2) selling, and (3) developing and owning
real business activities.
patents, trademarks, trade names, know-how, and other
intangible assets. (Corporations in the service industries
do only (2) and (3).) For our purposes, manufacturing
and selling are more or less generic activities. On the
To reduce overall foreign taxes and reduce U.S.
other hand, the development and ownership of intan-
taxes, corporate tax planners try to move as much of
gible assets are what give a company its special or
their real business operations as possible to low-tax
unique value.
countries. People on the business side may have differ-
Profits are what a company earns after paying all ent objectives. For the most part, they want to locate
expenses, including interest. The company generates selling activities close to their markets and manufactur-
profits from all three sources. The figure on the next ing activities where labor costs are low.
page illustrates a profit ‘‘pie’’ for a typical large multi-
national corporation. Except for tax purposes (and In most cases, particularly in the short term, the tax
sometimes to track performance of different divisions), planner is confined to devising ways to shift profits
the corporation usually does not care where the profits without shifting real business activities. Ideally, manu-
are located geographically. facturing and selling would be attributed to low-tax
TaxAnalysts—BriefingBook 9
NEWSANDANALYSIS
by competitors, the U.S. patent no longer has high
SlicingaMultinational'sProfitPie (C
Example:TotalWorldwideProfit=$100 value. It also asserts that the U.S. trade name is compa- ) T
rable to other trade names that are licensed for royal- a
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ties of less than 5 percent of the U.S. sales price (that A
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is, less than $2.50). aly
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MParnouffitacFtruorming ProSfeiltliFnrgom theFtorarnaslfletrhforsoemretahseonIrsi,shaspuribcseidoiafr$y2t5oitshcelaUim.Se.dpaforernt. ts 2008
$30 $25 TshuahrveeeIttRohSeseratetglsreoeucerascsteeossttphoreoamculdapiittmlyalbalentcdraaunbessefceariutpsiesricuitinnddgoeeirssspunreeosst.- . All righ
That leaves the Ireland subsidiary with profits ($15) at ts re
triple the appropriate level ($5). The inflated profits are s
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subject to low Irish tax rates, rather than higher U.S. rv
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ProfitFrom rates. d. T
Patents,Trademarks, a
Costsharing—Example:PatentTransfertoBermuda.A x
Know-How A
U.S. pharmaceutical company anticipates that concerns n
$45 about excessive levels of protein in human blood will aly
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soon be a major health issue in the United States. It ts d
also realizes that, as the result of prior research, it has oe
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already developed a compound (intended to treat an n
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unrelated ailment and never brought to market) with t c
countries. But because major markets are generally lo- the ‘‘side effect’’ of reducing that protein. la
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cated in high-tax countries, the usual goal is to at- The remaining additional product development, in- co
tribute profit to manufacturing if it is located in a low- p
cluding drug trials, will take place in the United States. y
tax country. The compound will be sold primarily in the United righ
But the biggest and most lucrative slice of the pie States, where the company already has a well-trusted t in
for tax purposes is the profit attributable to patents, name, through extensive efforts by the U.S. sales force. an
trademarks, and know-how. Whenever possible, owner- Without any tax planning, all profit from the new y p
ship of valuable assets — almost always developed in product would be generated in the United States. ub
the United States and other high-tax countries — is lic
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transferred to tax havens. Alternatively, income from The U.S. corporation decides to set up a company o
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high-profit patents is attributed to manufacturing and in Bermuda to hold the patent rights to the new drug. a
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selling activities in low-tax countries. To achieve that, the Bermuda affiliate must ‘‘buy in’’ to o
rights to the existing compound by making an up-front r th
The First Step: Shifting Profits payment. Because the previously disregarded com- ird
In this section we’ll discuss three general ways of pound had been considered to be nearly worthless, pa
shifting profits from one country to another. All of valuation experts are able to make the case that the rty c
them involve cross-border transactions between differ- buy-in payment from the Bermuda affiliate — and on
ent parts of a single multinational corporation. therefore the U.S. profit from the sale of the technol- ten
ogy — should be small. Subsequent research payments t.
TransferPricing—Example:IrishManufacturing.Sup-
by the Bermuda subsidiary are not large relative to ex-
pose a U.S.-headquartered corporation has an affiliate
pected sales revenues.
that manufactures computer components in low-tax
Ireland. Each component sold to ultimate customers in The hoped-for result is soon realized. The repack-
the United States for $50 costs the Irish subsidiary $10 aged compound is a blockbuster, and most of the profit
to produce. is attributed to the Bermuda subsidiary. The company
Because the Irish operation has an efficient and rela- is able to do that because it successfully argues that
tively simple manufacturing process, a reasonable re- most of the profit was created by the Bermuda-funded
turn for the Irish subsidiary would be 50 percent over research. Profits attributable to U.S. sales efforts and
costs, or $5 per component. Therefore, a reasonable the trade name are, however, subject to U.S. tax.
price for sales from the Irish subsidiary to the U.S. par-
Intracompanyloans—Example:LuxembourgLending.A
ent is $15 per item.
U.S. company has a profitable subsidiary in France. It
The U.S. company, however, asserts that the engi- also has an affiliate in low-tax Luxembourg. The Lux-
neers in Ireland have made considerable product im- embourg affiliate makes a loan to its French sister that
provements and, with no help from the U.S. parent, is large enough to ensure that interest paid by the
Irish managers have made considerable developments French firm to the Luxembourg company nearly elimi-
in the process of manufacturing the components. The nates profit in France. The business profit formerly
company also argues that because of advances made generated in France has been transformed into interest
10 TaxAnalysts—BriefingBook
NEWSANDANALYSIS
profit in Luxembourg. Consequently, profits avoid in the United States and allow the shifting of profits to
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French tax and become subject to very low tax in Lux- a tax haven. Two techniques are described here. ) T
embourg. In the first example, the lending entity is a subsid- ax
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The Second Step: Avoiding U.S. Tax iary of the corporation in the high-tax countries but n
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incorporated in the low-tax country under that coun- ly
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Generally under U.S. tax law, there is no U.S. tax on try’s laws. The high-tax country respects the interest ts
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foreign profits until those profits come ‘‘home’’ in the payments to that corporation and allows deductions. 0
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form of dividends. There are, however, important ex- So far, everything is normal. But then — because of 8. A
ceptions to that rule. rUu.lSe.slainwtro—dutcheedeinntitthyeinlatthee1l9o9w0-stadxesciognuendtrytocsainmplify ll rig
The first exception applies when profits have all the choose to be a branch for U.S. tax purposes. Because it hts
appearances of being artificially routed through tax is an unincorporated branch (as opposed to an incorpo- re
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havens by means of related-party transactions. For ex- e
rated subsidiary), it is not considered a separate entity rv
ample, a subsidiary of a U.S. company operating in for U.S. tax purposes. What foreign law sees as two ed
high-tax Germany might first sell goods ultimately des- separate entities, U.S. law sees as a single consolidated . T
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tined for the United States to its subsidiary in low-tax entity. So for U.S. purposes, there is no loan, and there x A
Switzerland so that profits properly attributable to is no interest subject to U.S. tax. na
manufacturing in Germany and selling in the United ly
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States are booked in Switzerland. Because that type of ts
The new wave of international d
behavior is recognized as abusive under U.S. statutes, o
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the United States taxes the Swiss profits currently — tax avoidance gets around the s n
even though they have not been distributed to the U.S. 1960s’ rules by using ot c
parent. la
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The second exception involves profit generated from partnerships and other c
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portfolio-type investments not related to that subsid- noncorporate entities. y
iary’s core business. The United States often will tax rig
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interest, dividends, rents, royalties, and capital gains on t in
investment held by foreign subsidiaries of U.S. compa- a
In the second example, the U.S. company takes ad- n
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nies. vantage of differences in U.S. and foreign tax law. Un- pu
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The rules for taxing undistributed foreign profits der U.S. law, a corporation is considered located in the lic
were devised in the early 1960s when U.S. companies country where it legally has incorporated. Often under do
conducted most of their business operations in high-tax foreign law, a corporation is considered located where ma
countries using subsidiary corporate entities. In those it conducts business. As in the previous example, the in o
days, most transactions within the controlled group company wants to shift profit to a low-tax country by r th
were simple buy-sell arrangements. As we shall see, the having its affiliate there make a loan to another affiliate ird
new wave of international tax avoidance gets around in a high-tax country. This time the entity in the low- pa
the 1960s’ rules by using partnerships and other non- tax country formally incorporates in the high-tax coun- rty
corporate entities and by having affiliates conduct ser- try — so for U.S. purposes there are two incorporated co
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vices for one another without the physical exchange of subsidiaries in a high-tax country. But because the en- te
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goods or materials. tity conducts business from the low-tax country, the t.
high-tax country considers it incorporated in the low-
LoansFromLow-TaxAffiliates.Asillustratedearlier,it tax country and allows deductions for interest pay-
is easy to move profits from one country to another by ments to it. The United States does not tax the interest
having the part of a company in a low-tax country paid to the lending affiliate because of an exception
make a loan to another part of the same company in a under the law that allows interest paid from one corpo-
high-tax country. The tricky part is successfully avoid- rationtoanotherrelatedcorporationinthesamecountry
ing the U.S. tax rules designed to penalize and prevent to be exempt from U.S. tax.
that behavior by taxing the interest earned in the low-
NotSelling—JustContracting.Asshownabove,rout-
tax country.
ing goods through tax havens and then adjusting trans-
If the two related affiliates on each side of the loan fer prices is another method of lowering international
are corporations, the United States taxes the interest taxes. Because a transaction with a related-party sub-
immediately. The income is not sheltered, and instead sidiary in which no significant business activity takes
of paying tax to the high-tax country, as it was doing place is a hallmark of tax avoidance (especially because
before the loans, the corporation is paying tax to the the subsidiary is in a tax haven and profits accumulate
United States. But there are ways around this rule. A there at unusually high rates), U.S. law reaches the
good tax planner takes advantage of the differences low-tax subsidiary and taxes that profit immediately.
between U.S. and foreign tax laws. The inconsistencies Suppose a subsidiary of a U.S. company manufac-
allow the profits to be shielded from current taxation tures in Germany and then sells its products to a
TaxAnalysts—BriefingBook 11
NEWSANDANALYSIS
French distribution subsidiary of the same U.S. com- rate is 35 percent, U.S. tax on foreign profits — which
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pany. If a Luxembourg subsidiary gets in the middle of would be $35 in the absence of the credit for foreign ) T
the transaction — buying from Germany and then sell- taxes — is $10. a
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ing to France — the United States would tax that Lux- A
The credit, however, is limited to the U.S. tax rate, n
embourg profit. 35 percent of profits. So if a foreign subsidiary of a aly
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To get around U.S. tax law, the Luxembourg subsid- U.S. corporation earns $100 of profit that’s subject to ts 2
iary buys raw materials needed by the German manu- foreign tax at a rate of 45 percent, only $35 of foreign 00
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facturing subsidiary and hires the German subsidiary tax credit is allowed. . A
atoosntathhceeoLnseutrlxlaiecnmtgmbsoiaduneru,gftachcoetmuLrpuearxnetyom’smbosapukerecgipfsirucoabdtsiuiodcnitass.ryaFcuhcriortrehdseirn,g seuxbaTsmihdpeilaetra,ixesusmpinpaogbsiocethhaalUpop.wSe.-ntcasoxwrpahnoedrnathtihiogenhU-itsa.Sxp.acpyoainuregnntfrtoiehrsea.isgFnor ll rights re
the French subsidiary to sell the goods on a commis- s
tax of $45 on $100 of profit. If through some sort of e
sion basis. rv
profit shifting the corporation can get $50 of that profit e
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The German company never owns the raw materials in a country with a 25 percent tax rate, its average for- . T
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or the finished goods, so there are no ‘‘sales’’ to Lux- eign tax rate would be 35 percent, and all foreign taxes x
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embourg. The French company never takes possession would be creditable against U.S. tax. n
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of the goods either, so there are no related-party Alternatively, if only (about) $22 of foreign profit is lys
‘‘sales’’ in France. Because of the way U.S. tax law is shifted to a zero-tax jurisdiction, the foreign tax rate ts d
structured (the focus is on related-party sales), there is will also be reduced to (about) 35 percent. Again, all oe
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no U.S. tax on the profit earned in Luxembourg. foreign taxes would be creditable against U.S. tax. n
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TaxTreatyInsteadof TaxHaven.Thefollowingtax- In both cases, foreign taxes are reduced by profit t cla
motivated structuring takes place entirely within a shifting. There is no U.S. tax either before or after prof- im
high-tax foreign country. Suppose the United States has its are shifted. co
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a tax treaty with the country under which much of the y
profit earned in that country by U.S. residents is ex- Conclusion righ
empt from foreign tax. This article attempts to provide a basic understand- t in a
A U.S. company with a subsidiary doing business in ing of some current international tax-planning tech- ny
the high-tax country sets up a second financing affiliate niques. In addition to more complex versions of the pu
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there. The second affiliate is structured as a partnership transactions described here, there are ways other than lic
under foreign law, and for that reason it is not subject those described here to use U.S. international tax rules do
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to foreign corporate tax. The partnership makes a loan to avoid U.S. taxes. For example, a U.S. company can a
to the related corporation, and the corporation deducts generate extra tax deductions for otherwise nondeduct- in o
the interest. The partnership earns interest that flows ible payments by using foreign ‘‘captive’’ insurance r th
through to its partner — the U.S. parent. Under the tax companies. Tax planners also spend an enormous ird
treaty, the payment to the partner is exempt from tax amount of time shifting losses and various types of pa
in the high-tax country. But because of the flexible U.S. expenses to maximize foreign tax credits. rty
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tax rules (discussed above), what is considered a part- o
Another major issue for international tax planners, n
nership under foreign law can be a corporation under te
especially now that undistributed foreign earnings are n
U.S. law. Because the two subsidiaries that are party to t.
accumulating at an accelerated rate, is how to bring
the loan are in the same country, interest profit earned
profits back home without triggering U.S. tax. A legis-
by the financing subsidiary is not taxed in the United
lative answer is currently in the works. The House of
States because of the treaty.
Representatives and the Senate both have passed legis-
TaxHavenOffsetstoHighForeignTaxes.Sometimesitis lation that would provide — for a limited time only —
beneficial to generate profits in a low-tax country even a substantial tax break for dividends (profits) received
when the profits cannot be deferred and are subject to by U.S. corporations from their controlled foreign cor-
U.S. tax. That can happen because of the way the for- porations. At this time, the outcome of the conference
eign tax credit — more precisely, the way the limitation committee negotiations to determine a final version of
on the foreign tax credit — is calculated. this legislation is uncertain.
To prevent double taxation of foreign profits, the
Note to the Reader
United States could just tax domestic profits and ex-
empt foreign profits from tax. Instead, the United The following commonly used technical terms were
States taxes worldwide profits and provides a tax credit intentionally omitted from this article: deferral, antide-
equal to foreign corporate taxes. So, in the simplest ferral, repatriation, subpart F, foreign base company
case, a subsidiary of a U.S. corporation that pays $25 income, foreign personal holding company income,
of foreign tax on $100 of foreign profits generates a foreign base company sales income, foreign base com-
$25 foreign tax credit. Because the U.S. corporate tax pany services income, commissionaire, hybrid, reverse
12 TaxAnalysts—BriefingBook
NEWSANDANALYSIS
hybrid, check-the-box, dual resident, excess limit, ex- The use of entities that are partnerships for U.S.
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cess credit, manufacturing exception, branch rule, pas- purposes but corporations under foreign law — so- ) T
sive, and active, as well as all references to specific In- called hybrids — has been described by the IRS, the a
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ternal Revenue Code sections, Treasury regulations, Treasury, Lowell D. Yoder, and Lee Sheppard. The use A
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and IRS pronouncements. If you want more details of hybrids took off in the late 1990s because of Trea- aly
and want to learn the jargon, read some of the excel- sury’s issuance of the ‘‘check-the-box’’ rules. The Trea- sts
lent articles in the references listed below. sury’s attempt to issue regulations to prevent the use of 2
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hybrids was thwarted by Congress, which threatened to 8
The weakness of U.S. transfer pricing rules (section overturn the regulations if they were issued. . A
4b8ee2n) iwsrwitetellnkbnyowStne.pThwenoSinhtaeyr,efsotirnmgeerxTarmeainsuatriyoninstehranvae- The advantages of corporations that are resident in ll rig
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tional tax counsel who’s now with Ropes & Gray, and one country for U.S. purposes and in a second country ts
H. David Rosenbloom of Caplin & Drysdale. Shay for purpose of foreign law (so-called dual resident cor- res
e
writes: porations) have been described by Treasury, Yoder, rv
e
Sheppard, and Shay. d
The reality is that the IRS is unable to meaning- . T
fully audit most transfer prices. The practical ef- The use of contract manufacturing and ‘‘commis- ax
fect of the transfer pricing regime is to constrain sionaire’’ arrangements to avoid the reach of subpart F An
transfer pricing that is significant enough to at- rules — which tax foreign income not yet paid as a aly
tract attention and allow a substantial amount of dividend to the U.S. parent — is described by Treasury, sts
moderate income shifting. Yoder, and Shay. do
e
Rosenbloom observes that transfer pricing has more Reverse hybrid foreign entities — that is, foreign s n
to do with negotiating skill than with the arm’s-length affiliates of U.S. corporations classified as partnerships ot c
under foreign law but as corporations under U.S. law la
principle (which at one point he characterizes as ‘‘non- im
— are described by Treasury, Yoder, Sheppard (search
sense’’): c
‘‘reverse hybrid’’), and Shay. op
The promised impartiality of the [arm’s length] ‘‘Cross-crediting’’ is not a recent innovation. Its ad- yrig
method dissipates into a familiar trading of h
horses in light of the relative leverage...between vantages have been described in many places (for ex- t in
ample, by the Joint Committee on Taxation). a
taxpayer and tax administrator when a contro- n
y
versy surfaces. Taxpayers in the United States can References p
u
threaten to extend the examination using a vari- Internal Revenue Service, Notice 98-11, 1998-1 C.B. blic
ety of procedures and means at their disposal; the d
433. o
administrator can threaten penalties and rely on m
a
the expense of litigation. Some things never David R. Hardy, ‘‘Assignment of Corporate Opportuni- in
change. tJiuelsy—28T, 2h0e0M3,igpr.a5ti2o7n. of Intangibles,’’ Tax Notes, or th
The rules taxing foreign active income shifted to tax ird
JointCommitteeonTaxation,FactorsAffectingInterna- p
havens currently are needed to take pressure off trans- a
fer pricing rules. In other words, if transfer pricing tional Competitiveness, JCS-6-91, May 30, 1991. rty c
(and other income-shifting practices) could be effec- Avi M. Lev, ‘‘Migration of Intellectual Property: Unin- on
tively policed, a lot of antideferral rules would not be tended Effect of Transfer Pricing Regs,’’ Tax Notes, ten
necessary. Dec. 9, 2002, p. 1345. t.
There are massive problems with the existing cost- Burgess J.W. Raby and William L. Raby, ‘‘Captive In-
sharing regulations, as noted by Avi Lev, David Hardy, surance — Some Lights in the Fog,’’ Tax Notes, Dec.
and Treasury itself (2002). The Treasury intends to 30, 2002, p. 1711.
issue new regulations soon. H. David Rosenbloom, ‘‘Banes of an Income Tax: Le-
gal Fictions, Elections, Hypothetical Determinations
Rosenbloom has argued that related-party debt is
andRelated-PartyDebt,’’TaxNotesInternational,
nothing like debt between unrelated parties and that it
Dec. 15, 2003, p. 989.
should not be respected for tax purposes, especially
because it is almost always used for tax avoidance. He H. David Rosenbloom, ‘‘Why Not Des Moines? A
notes that ‘‘related-party debt is a principal tool of the Fresh Entry in the Subpart F Debate,’’ Tax Notes
tax planner.’’ He writes that only a tax professional International, Dec. 8, 2003, p. 895.
would treat related-party debt as equivalent to a loan Stephen E. Shay, ‘‘Exploring Alternatives to Subpart
from an unrelated party, and only a tax professional F,’’ Taxes, March 2004. p. 31.
would treat interest on a related-party loan ‘‘as a legiti-
Lee A. Sheppard, ‘‘Rethinking Subpart F,’’ Tax Notes,
mate cost of the funds needed to operate a business.’’
Jan. 8, 2001, p. 149.
He adds, ‘‘The application of this rationale in a
related-party context, where no funds are being raised, Lee A. Sheppard, ‘‘Turbo-Charged Income Stripping,’’
is one of the tax miracles of our time.’’ Tax Notes, Nov. 25, 2002, p. 994.
TaxAnalysts—BriefingBook 13