Tax Analysts Blog

Transfer Pricing for the Common Man

Posted on Oct 25, 2010

In an expertly choreographed effort to win public sympathy, (articles here, here, and here) our nation's largest and most profitable companies are lobbying Congress to enact special tax relief for "trapped" foreign profits. But how did the money get there in the first place? Answer: The multinationals pushed tax rules to the limit and got away with it.

Imagine the average American family doing the same thing. John and Mary Smith set up a shell corporation in Bermuda. They sell that corporation all their "know-how" from their years of education and professional experience. The price of this sale is a nominal fee and promise to pay the fees of John and Mary each attending one professional conference each year. John and Mary Ltd. then charges the real John and Mary $50,000 in royalties for the use of that know-how. John and Mary get to deduct $50,000 from their U.S. income tax and the $50,000 is tax-free in Bermuda.

Well, that would be wrong. And that's the reason U.S. tax laws don't allow individuals to do it. But it is standard business practice for giant U.S. companies like GE, Microsoft, Pfizer, and Google. Arcane complexity and behind-closed-door politics obscures a simple fact: the competitiveness of American companies is more important than the competitiveness of American families.

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