Pushing Back On Deficit Reduction II – Transfer Pricing Abuse

When you were sitting down and struggling with your taxes this spring, wondering if you were supposed to be supporting the US federal budget all by yourself, be reassured: you were correct.

Because you could simply do away with the Department of Homeland Security. Just get rid of it entirely, along with all the departments and divisions within it. Just wipe it out, erase it from the budget, and save the taxpayers about $43 billion dollars annually.

Or you could fund it in its entirety, and then some, with the estimated $60 billion in federal tax revenues which are lost by the US through just one of the various off shore tax avoidance evasion practices: transfer pricing abuse:

I won’t link to any, because I’m certain we’ve all seen the calls to slash the deficit and to cut government spending. The TARP, two wars, the jobs stimulus bill, an insanely bloated defense budget, and more are all being used as justification to attack programs which Wall Street concludes as “wasteful” and all the while, entitlement programs are coming under scrutiny to determine exactly where Wall Street intends to siphon off more public funds in the years to come. If you want to see the calm, sober traders of Wall Street actually saying these things, then shoot over to my last diary: Deficit Reduction I – Pushing Back On The Myth, which also helps put some perspective on what this diary is all about today.

Getting Our Arms Around The Problem . . .

In my first diary on this topic we can clearly see what Wall Street wants in fiscal concessions to the greater levels of taxation they anticipate: cuts in the safety net, particularly in Social Security and Medicare.

The deficits are real – there is no arguing with that. The exact numbers in budget shortfalls may be argued over but not the fact that the Washington is spending more than it’s getting back in its various revenue streams. However, as I pointed out in that diary, taxation in the United States clearly follows a different reality: according to a pair of GAO reports commissioned by Carl Levin and Bryan Dorgan (One and Two), 60% of all US corporations paid no income tax during the “boom” years of 1998 to 2005:

Number of Companies With a Tax Bill of ZERO:
Tax year Foreign returns U.S. returns
1996 46,791 (67.6%) 1,360,566 (60.3%)
1997 50,625 (71.7%) 1,331,638 (60.9%)
1998 50,671 (71.8%) 1,335,000 (61.0%)
1999 50,149 (72.3%) 1,310,280 (61.2%)
2000 50,688 (73.3%) 1,332,239 (63.0%)

Just how corporations manage to take advantage of the transfer pricing legal loophole which is unavailable to ordinary taxpayers shows that the balance sheets investors rely upon to judge a company’s health and tax officials use to determine corporate tax liability are, in short, a pack of lies.

From an excellent description on the mechanics of transfer pricing abuse by the Tax Justice Network:

“For example, take a company called World Inc., which produces a type of food in Africa, then processes it and sells the finished product in the United States. World Inc. does this via three subsidiaries: Africa Inc. (in Africa), Haven Inc. (in a tax haven, with zero taxes) and America Inc. (in the United States).

Now Africa Inc. sells the produce to Haven Inc. at an artificially low price, resulting in Africa Inc. having artificially low profits – and consequently an artificially low tax bill in Africa. Then Haven Inc. sells the product to America Inc. at a very high price – almost as high as the final retail price at which America Inc. sells the processed product. As a result, America Inc. also has artificially low profitability, and an artificially low tax bill in America. By contrast, however, Haven Inc. has bought at a very low price, and sold at a very high price, artificially creating very high profits. However, it is located in a tax haven – so it pays no taxes on those profits.”

How big is this problem? Nobody knows for certain, but we can assume that it’s huge. WTO put the value of all world exports at $15.8 trillion (2008). Though world trade diminished by 9% in 2009, this year should see a rebound to the 2008 level. When you consider:

“. . . that more than 60% of world trade takes place within multinational enterprises, the importance of transfer pricing becomes clear.”


I could go into just how these pricing practices affect developing nations, whose undervalued exports are estimated to have cost African governments $1 trillion in tax revenues or I could go on about how transfer pricing abuse has robbed developing nations of four times the total amount of aid flows, or on the distortions this causes in evaluating the global balance of trade, but I want to stay focused here on the coming US deficit debate and on corporate tax evasion.

Because Wall Street is preparing to rob us all once again.

The $5665 Toothbrush . . .

“A 2001 report by the U.S. senate alleges that multinational corporations evaded up to $45 billion in U.S. taxes in 2000 by using transfer pricing to manipulate income.3 the same report details one company selling toothbrushes between subsidiaries for $5,655 each!”


Transfer pricing abuse works in both directions. Overpricing imports artificially misstates the costs of corporations who want to sell their products in the US, while underpricing exports artificially understates the profitability of those products we sell abroad. The aim is to manipulate the amount of tax liability any given corporation can be held responsible for by the IRS.

And they do it by lying. Quite openly. Here’s a sales brochure on transfer pricing consulting services offered by KPMG.

From a study by Simon Pak, of Penn State, and John Zdanowicz, Florida International University highlighted just how distorted corporations are pricing their sales purchases:

Overvalued US Imports:
untrimmed pillowcase (#) $909.29
blank magnetic discs (#) $698.16
flashbulbs (#) $321.90
single edge razor blades (#) $5.33
raw cane sugar (kg) $1,407
slip joint pliers (#) $489.75
oats $142.87/kg
women’s cotton briefs $50/unit
slide projectors $8,620/unit
binoculars $3,395/unit
emeralds $17,976/carat
Undervalued US Exports:
tires (#) $7.69
enriched uranium (kg) $15.50
machine guns (#) $364.08
military rifles (#) $106.87
new bulldozers $387.73/unit
rocket/grenade launchers $59.50/unit
forklift trucks $555.73
new tires $3.97/unit
prefab buildings $2.12

The world average prices are available at the link, but anyone with an ounce of common sense can readily see that these prices are hugely distorted from actual market pricing, even on the wholesale level. We also see from these figures that not only is transfer pricing a way to evade taxes, but it’s a wonderful way for drug smugglers and terrorists to launder money into and out of the United States.

Pushing Back . . .

If you haven’t yet read my previous diary, you should do so, or else what I write next will make little sense.

President Obama’s deficit commission is due to present its report by December 1, and it is widely expected that Social Security, Medicare, and other safety net programs will be put under the microscope and specific cuts will be recommended. It is expected, by some, that Social Security “reform” will become a topic of debate no later than next summer, though I expect the fight will begin sooner, with Obama’s next budget proposal due out next January.

At which point, the noise levels will ratchet up, and deficit hawks everywhere will be out in force with their fear mongering about how bad the situation is, and how mild their proposed cuts really are. I expect Wall Street to make it more expensive for the US government to raise money by insisting on higher yields on US Treasury offerings. We may even expect these same market players to begin shorting the dollar prior to the opening of debate to soften up the public and cause an outcry in the business press over the deplorable state of the budget and the economy.

When one considers:

  • that Wall Street has long been the beneficiary of federal subsidies in the form of deferred taxes on contributions to 401k and IRA savings plans,
  • that we occasionally go to war to protect US corporations,
  • that overt tax breaks, at all levels of government, are regularly extorted by Amerikan businesses, and
  • that much of the recent debt is the result of, if not the TARP, then the secret capital injections and lending facilities the fed is battling to keep secret from US taxpayers,

it appears crystal clear to me that corporations in the US have overwhelmingly succeeded in fraudulent, rent-seeking appeals to Washington, and that they intend to continue this, until we reach economic collapse, in exactly the same fashion that Wall Street financed the recent lending spree to create the current global financial crisis.

One Last Word . . .

It seems incredible to me that anyone can claim that those taking the side on this that I’m taking here can be accused of trying to foster class warfare, but we have indeed heard this as well. Incredible because, when you consider the lies that live in the shadows behind this public tearing of hair over deficits are so enormous, that we may justly claim that US corporations have actually been making war on ordinary Americans all along.


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