How Should the U.S. Stop Profit Shifting

How Should the U.S. Stop Profit Shifting

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In the current debate about international tax reform... [t]here are several proposals now being floated (including one in the President's budget (Treasury "General Explanation" of FY 2013 Budget, p. 88) and Options A and C of Ways and Means Committee Chair Dave Camp's Discussion Draft ("Section-by-Section" summary pp. 32-35)) that try to backstop our inadequate transfer pricing rules by subjecting foreign income to U.S. tax if that income is from an intangible asset (e.g., patents, trademarks, trade names). It [is] well known in the international tax community that income from these assets is often inappropriately shifted into tax havens.

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I would suggest Congress develop formulaic rules to target situations where transfer price abuse is likely. Two indicators that also have been suggested by the President and Chairman Camp are low levels of foreign tax and high rates of return. Any backstop to our current transfer pricing rules should target income that is subject to low tax and is generating high returns. Mechanical rules can be developed for each of these standards. This would result in far less uncertainty and far fewer administrative difficulties than a facts and circumstances determination.

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