RICO Meets Keiretsu: A Response to Predatory Transfer Pricing

Japanese cartels known as keiretsu pursue illegal transfer pricing policies which cost American taxpayers billions of dollars and place American businesses at a competitive disadvantage. Keiretsu-controlled subsidiaries located in the United States buy goods, financial products or services from their Japanese parent at fraudulently inflated prices. Their dual purpose is to create artificial business expenses and costs (thereby reducing taxable income and paying little or no United States corporate income tax) and to gain an edge on American businesses through tax evasion. Mr. Harmon proposes that American businesses respond to this problem with techniques normally used against organized crime. The Racketeer Influenced and Corrupt Organizations Act (RICO) can combat the anti-competitive market effects of keiretsu. When transfer pricing damages American businesses through tax evasion and money laundering, RICO\u27s treble damage provisions provide them with the means to recover lost profits. RICO provides a juridical approach to what has been treated as a matter of international diplomacy. By offering a domestic legal solution to curb corporate Japan\u27s predatory trade practices, Mr. Harmon undertakes to neutralize Japan\u27s powerful political resources and provide a private remedy for harmful trade practices which the Government has been unable to control

Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length?

This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations

Rewarding the consumer for curbing the evasion of commodity taxes?.

Monetary or in-kind transfers can be used as an incentive for consumers to request o.cial receipts for goods they purchase. A novel system of in-kind transfers in the form of lottery tickets has recently been introduced in China. Price subsidies (often granted through tax deductions or refunds) are also widely used. This paper extends the standard model of commodity tax evasion for firms (in a competitive market and under the conjectural variation approach) in order to describe the e.ects of subsidies on tax evasion and in terms of incidence and of government revenue. The role of search costs and of enforcement costs is also taken into account.

The Dark Side of Transfer Pricing: Its Role in Tax Avoidance and Wealth Retentiveness

In conventional accounting literature, ?transfer pricing? is portrayed as a technique for optimal allocation of costs and revenues amongst divisions, subsidiaries and joint ventures within a group of related entities. Such representations of transfer pricing simultaneously acknowledge and occlude how it is deeply implicated in processes of wealth retentiveness that enable companies to avoid taxes and facilitate the flight of capital. A purely technical conception of transfer pricing calculations abstracts them from the politico-economic contexts of their development and use. The context is the modern corporation in an era of globalized trade and its relationship to state tax authorities, shareholders and other possible stakeholders. Transfer pricing practices are responsive to opportunities for determining values in ways that are consequential for enhancing private gains, and thereby contributing to relative social impoverishment, by avoiding the payment of public taxes. Evidence is provided by examining some of the transfer prices practices used by corporations to avoid taxes in developing and developed economies

Tax Evasion and Growth: a Banking Approach

The paper formalizes the relation between flat taxes and growth when there is a competitive equilibrium tax evasion. A decentralized tax evasion service is supplied by the banking sector. The bank production function follows the financial intermediation microfoundation approach, with deposits as an input. Across a class of endogenous growth models, tax evasion decreases the effective tax rate, and thereby lessens the negative effect of taxes on growth. And as the tax rate rises, tax evasion causes the growth rate to fall by less. Underlying the results is a fiscal principle whereby tax evasion creates, or magnifies, a rising demand price sensitivity to higher tax rates.Tax evasion, financial intermediation, endogenous growth, and flat taxes.

U.S. International Corporate Taxation: Basic Concepts and Policy Issues

Recent deficit reduction and tax reform plans have included broad proposals to reform the U.S. international corporate tax system. These proposals have raised concerns over how changing the way American multi-national corporations are taxed could impact the deficit and debt, domestic job markets, competitiveness, and the use of corporate tax havens, among other things. An informed debate about how to reform the system governing the taxation of U.S. multi-national corporations requires careful consideration of these issues, as well as a basic understanding of several features of the current system. This report provides a general introduction to the basic concepts and issues relevant to the U.S. international corporate tax system. The explanations provided in this report emphasize the underlying concepts of the international tax system and are intended to be as simplified as possible. There are of course important and complex technical details that would need to be considered carefully if reform of the current system were to be implemented effectively and efficiently. These important technical details, however, are beyond the scope of this report. Where appropriate, references to other CRS products are provided within the report. A list of related CRS products and other suggested readings on international corporate taxation may also be found at the end of the report

The effects of the underground economy on economic competitiviness

A real, almost palpable, connection exists between the official and the underground economy. More than that, both sides of the economy (official and underground) are connected with the competitiveness of a country. Strangely a large presence of undereground in the economy is a sign of competitiveness. Although we would be tempted to say that underground is bad for competitiveness the reality is that due to taxes and regulations the resources (especially the human ones) used ”illegaly” would probably be wasted. In the end the wages from the underground economy return to the oficial one suporting it and hence the competitiveness of the country.official economy; underground economy; illegal activities; tax evasion; economic competitiveness

Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length?

This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.outsourcing; profit taxation; transfer pricing; arm's length principle; multinational firms

Sorting into Outsourcing: Are Pro ts Taxed at a Gorilla's Arm's Length?

This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.outsourcing; profit taxation; transfer pricing; arm's length principle; multinational firms

Tax Competition With Parasitic Tax Havens

We develop a tax competition framework in which some jurisdictions, called tax havens, are parasitic on the revenues of other countries. The havens use real resources to help companies camouflage their home-country tax avoidance, and countries use resources in an attempt to limit the transfer of tax revenues to the havens. The equilibrium price for this service depends on the demand and supply for such protection. Recognizing that taxes on wage income are also evaded, we solve for the equilibrium tax rates on mobile capital and immobile labor, and we demonstrate that the full or partial elimination of tax havens would improve welfare in non-haven countries, in part because countries would be induced to increase their tax rates, which they have set at inefficiently low levels in an attempt to attract mobile capital. We also demonstrate that the smaller countries choose to become tax havens, and we show that the abolishment of a sufficiently small number of the relatively large havens leaves all countries better off, including the remaining havens.