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TRANSFER PRICING:A CORPORATE SHELL GAME

By by Joseph P. Horgan, Project Director, Tax Justice Network – USA  Posted by Joseph Horgan (about the submitter)     Permalink       (Page 1 of 1 pages)
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A carny will at least tell you up front that he's running a shell game. —the Senator Peter Fitzgerald (R-IL) to Ken Lay, disgraced CEO of Enron.1

The shell game is as old as money and is played the world over. Corporations loyal to no nation are now operators in a version of the shell game. And, like any shell game, a bettor can only win if the operators want you to win.

Here's how corporations play:

First, corporations establish an overseas buyer for its product.

Next, they establish a shell company in a tax haven jurisdiction. At the height of its grand deception, Enron had over 440 shell companies on the tiny Cayman Islands.

Rather than sell the product direct to the buyer at a price that will cover the costs of production plus profit, the corporation sells it at a loss to their shell company, deducting the "loss" from their taxes.

Then, the shell company sells it at the price it maintains for the product when it's not selling to a shell company to the overseas buyer.

The company, through its shell company, makes a profit from the sale and by deducting the money it “lost” selling to its shell company.

As the shell game operators, the corporations ensure that they never lose. In 2003, corporations attributed $150 billion of their foreign profits to tax haven jurisdictions, up from $88 billion in 1999. At the corporate tax rate of 35%, that's $52.5 billion that these corporations are evading in taxes.

Taxes are the price we pay for a civil society. Paying taxes is not some carny shell game. Corporations enjoy the benefits of our civil society but are evading their tax responsibilities. We need to develop policies and regulations which will ensure that those who benefit from our free society pay their fair share of taxes.

First, corporations need to keep one set of books for investors and the IRS. Currently, publicly-traded corporations file two sets: one for the SEC and investors, and one for the IRS. The former is an optimistic snapshot of a corporation's finances; the latter, filed with the IRS, paints a gloomy picture of a destitute corporation. One set of books, clearly stating the financial status of a corporation is a simple fix.

We must also ensure that tax havens don't hide ill-gotten gains, whether from drug smuggling, terrorism, human trafficking, or from individual and corporate tax evasion schemes. We should encourage tax haven compliance with transparency standards. These 70+ tax havens should allow our government to investigate illegal activity without the usual run-around that allow the criminals to move their money before any warrants are issued. (In many of these tax havens, it is against the law for bank officials to cooperate with criminal investigations.)

Finally, we need politicians with the will to go after these corporations and their enablers, their shell companies and shell games who skirt the law and evade paying their fair price for operating in our civil society.

1“Enron's Top Man,” PBS NewsHour, February 12, 2002. www.pbs.org/newshour/bb/business/jan-june02/lay_2-12a.html

 

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