Tranfer Pricing

Victor

I though tranfer pricing operated by running European operations (high tax on low profit) through an Irish company (low tax on high profit) to reach a point where corporation / profit taxes were at or below US rates or is this piece (in relation to the American use of Shannon) just scaremongering?

http://home.eircom.net/content/unison/national/408671?view=Eircomnet

"I have a very strong feeling that were the United States administration to pursue a vindictive policy against Ireland they could make moves what would change dramatically the profitability of US firms in Ireland," said Dr Frank Barry, Professor of Business at University College Dublin.

He said that many US firms come to Ireland because of low corporation tax rates. They boost profits here by a complex series of "transfer pricing". This means that they pay their taxes in Ireland, rather than the US.

Previous attempts to "squeeze Ireland" by forcing them to declare profits in the US itself were sidelined because the Clinton administration's sympathetic attitude towards this country.

De Rebel

There are two different (but often connected) concepts here, "transfer pricing" and "profit repatriation" (or non-repatriation) as the case may be. The former is often used to achieve that latter, but can also be used for other purposes.

In a nutshell what US companies want to achieve is to transfer the income from the business offshore thereby subjecting it to a lower tax rate. For obvious reasons the US Federal and State tax authorities hate this and seek to prevent it.

To escape US tax, in essence "the substance" of the business must go offshore, not just the income. The rules are complex and arduous. Sufficiently complex that a minor change could cause all revenue to be treated as US revenue and accordingly subject to US taxes.

The US government could easily manipulate the rules if it wanted to punish a company or a country. Whether it is likely to do so or not is a political rather than an economic question. My guess is that this is scaremongering, in the short-term at any rate.