Tax-Haven Changes Proposed

''This is not a small correction to the existing regulations,'' says one international tax lawyer.
Craig SchneiderAugust 25, 2005

Federal regulators are proposing new rules aimed at curbing efforts by multinational businesses to shift income to low-tax jurisdictions overseas, according to reports.

The proposal focuses on how high-tech, pharmaceutical, and other companies value intangible assets such as research and development, marketing, and patents, according to the Financial Times, citing a Treasury Department official. Regulators in Washington have alleged that some companies have improperly used transfer pricing to increase their profits in countries where corporate taxes are low and reduce them in the United States.

Reportedly, the new rules would establish a cost-sharing model for R&D projects that would treat foreign subsidiaries as if they were outside investors — and charge them a fair-market price for intangibles — the FT reported.

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“This is not a small correction to the existing regulations,” said William Dantzler, an international tax lawyer with White and Case, according to the FT. “It is a big deal and is intended to be.” Former IRS official Charles Triplett, now an attorney with Mayer, Brown, Rowe and Maw, countered that if the new proposals are overly aggressive, they “may actually increase, rather than decrease or resolve, the numerous high-dollar tax controversies in this area,” the newspaper added.

The Internal Revenue Service has also been trying to crack down on alleged transfer-pricing abuses. The IRS is currently pursuing a case against U.K.-based Glaxo SmithKline, claiming that its predecessor Glaxo Wellcome repeatedly shifted profits from the States to the United Kingdom by undervaluing the contribution of U.S. marketing efforts to the success of its ulcer drug Zantac.

The FT also noted a study by Martin Sullivan, a tax economist, who found that foreign profits of the six largest U.S. drug companies rose from 38 percent of their overall income in 1994 to more than 65 per cent in 2003, even though the percent of overseas sales grew only slightly. As a result, taxes on corporate profits for those companies reportedly fell from 31 percent to just 17.5 percent.