It’s that time again! As I do once every year, I’m turning over the blog to my readers for the last week in August. This year, readers had the opportunity to answer one of three tax-related questions; each of the questions is related to pending legislation or active issues in Congress.
I received a number of great responses. In order to have a balanced mix of posts, I have read through all of the submissions and have chosen those that represent a mix of viewpoints on each of the three issues.
Our next guest post was submitted by Barb:
One of the most controversial issues over the past year has been the issue of corporate tax reform. Do corporations pay their fair share? What, if anything, would you do to alter the current corporate tax structure?
Transfer pricing shenanigans between domestic and international corporate entities vexing the tax systems both in the US and in Europe. Corporations assign ownership of valuable assets to offshore entities in low tax regions, sell expensive products in higher tax areas, and then say that they really don’t have much profit in the high tax areas because the “cost” is that artificial high amount assigned to the offshore entity.
This current system tremendously benefits corporate giants like Google, Apple, and virtually all of the large pharmaceutical companies, but leave solely domestic corporations (especially smaller businesses) to pay the full, high corporate taxes charged in US and Europe.
There is no simple and perfect solution. Setting correct transfer prices is hard and theoretical. But remarkably, that is what good markets do every day. Why not let a market system solve a current market inefficiency?
A company that wants to transfer rights to an offshore entity must do so by public auction, open to any interested bidder. They may match the highest bid. The value of the bid is ordinary income to the company reported in the US based on the percentage of the product’s R&D expense that was US based. Apple develops the iWatch and spends $100MM on R&D, $66MM of which is spent in the US. They put it up for bid, and Nokia is the winning bidder at $3 billion. Apple can either match Nokia’s winning bid, or not. Either way, Apple then must recognize 2/3 of the proceeds ($2 billion) as ordinary income in the US subject to the full US corporate income tax.
It would be a small market, because much of the advantage of offshoring would go away — and that would be a very good thing.
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Thanks, Barb! Barb is a regular reader who prefers not to be identified by last name.
