$20,000 for a Refrigerator? Abusive Transfer Pricing Explained

Towards the end of last month, Ann Hollingshead blogged about Businesses and Investors against Tax Haven Abuse, a coalition of over 400 small business owners and investors looking to curb the use of tax havens and shell companies by their larger multinational competitors. But how exactly do these multinational entities use tax havens? One method, which takes advantage of the disparity in tax rates between jurisdictions, is transfer pricing.

Transfer pricing is an issue that has been described as incredibly lucrative to those involved and excruciatingly boring to everyone else. So naturally, this was the subject of a July 22^nd Congressional hearing by the House Ways & Means Committee. The hearing, which was called by Committee Chairman Sander Levin to examine “transfer pricing issues in the global economy,” followed the release by the Joint Committee on Taxation (JCT) of a report on income shifting and transfer pricing and featured numerous witnesses from the Treasury Department, business, and academia.

The JCT report examined the mechanisms used by six unnamed corporations to reduce their worldwide tax liability. Each of these corporations had an effective worldwide tax rate of less than 25 percent, with some reporting average tax rates as low as 10 percent. This is a far cry from the U.S. statutory tax rate of 35 percent. While the JCT report explicitly stated that these “six case studies do not represent a random selection of U.S.-based multinational corporations,” the studies still provide meaningful insight into how a corporation might use oversees subsidiaries and disregarded entities to conduct transfer pricing and manipulate its overall tax liability.

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This Just In: White House to Promote Global Transparency Standard in Extractive Industries

U.S. President Applauds New SEC Reporting Requirement, Vows to Campaign for Adoption of Similar Global Regulation

Last Wednesday, as President Obama’s signature graced the Dodd-Frank Wall Street Reform and Consumer Protection Act, the long-awaited overhaul of the financial regulatory system finally became the law of the land. This included a small but important provision, the Energy Security Through Transparency (ESTT) amendment, which is designed to increase transparency in extractive industries by requiring oil, gas, and mining companies registered with the Securities and Exchange Commission (SEC) to disclose material payments made to governments on a country-by-country basis. Now, with the White House recently applauding the ESTT amendment and expressing its commitment to establish similar reporting standards on a global scale, this small provision has ballooned into a tremendous opportunity to transform international transparency principles.

Since the passage of the Dodd-Frank bill by the Senate two weeks ago, numerous groups have praised the ESTT amendment’s passage. Radhika Sarin, the International Coordinator for Publish What You Pay, heralded it as “a reliable tool to ensure the wealth created by natural resource extraction is used for essential social services such as health and education, and economic development opportunities.” Oxfam described the provision as an important tool to aid the fight against corruption. Ann Hollingshead, in a previous Task Force blog post, called the provision an important step to “increase predictability and investors’ ability to calculate risks associated with investing in certain companies.” Even some major news outlets like the Washington Times reported on the ESTT amendment’s passage.

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Country-by-Country Reporting Requirements: The United States should follow Hong Kong’s lead

Collin Swan analyzes the groundbreaking, new reporting requirements at the Hong Kong Stock Exchange and examines the implications they will have on the proposed Energy Security Through Transparency (ESTT) Act in the United States.

Photograph by Brian Jeffery Beggerly

Today, the Hong Kong Stock Exchange (HKEX) is enacting a clear and comprehensive set of listing requirements for mineral companies that are in line with international standards and encourages greater disclosure and transparency. Under the new Chapter 18 of the HKEX Listing Rules, mineral companies applying for a listing on HKEX will be required to disclose important information about their exploration and extraction activities, including payments made to host governments. Revenue Watch has heralded these new rules as a “significant step forward in the global campaign to establish greater transparency and accountability in the extractive industries.” While these new rules are far from perfect and do not require country-by-country reporting on an annual basis, they are still a step in the right direction. After today, the HKEX will become the first stock exchange in the world to require any kind of country-by-country reporting by companies operating in extractive industries.

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