How major corporations commit tax fraud in overseas operations

I received a letter from a reader. My first. The writer wants to know more about how corporations are getting away with paying little taxes on their earnings by arranging for foreign tax shelters. The Presidential campaign and discussions on the issue on television had caused her to write. The issue of corporate tax evasion and foreign subsidiaries is front and center for the IRS as well as the Senate. There have been many recent whistleblowers who have come forward to report illegal “transfer pricing” schemes. Transfer pricing is frequently used by global companies with the purpose of minimizing taxes by reporting profits in jurisdictions having the lowest tax rates. In 2006 drug giant GlaxoSmithKline (GSK) paid $3.4 billion to the IRS to settle the governments assertions of abusive transfer pricing. Here’s how it works. A company headquartered in Pennsylvania is generally subject to combined federal and state taxes of 41.5%. A firm in Ireland is subject to a combined tax of 12.5%. The sales people in Pennsylvania grants the Irish subsidiary a cut of the price it pays for new material. Like magic, the profits on the company’s products have been shifted from the U.S. to the lower taxed Irish unit. Where prices are exaggerated this would be deemed tax evasion. Companies have other ways in which they evade taxes as well. America doesn’t chase its companies for income tax if the income is kept overseas. The moment it comes here it is fair game. However there is an exception — a loophole — for funds that flow back as short term loans to other parts of the corporation. However where the moneys continue to flow as short term loans, the meaning of short term becomes tortured. Combined with a vigorous new whistleblower program, the IRS is actively looking for cases of corporate fraud and tax evasion and the whistleblower now gets upto 40% of what the government recovers.