Foreign Firms May Be Cheats on U.S. Taxes
American subsidiaries of foreign firms may be underpaying their U.S. income taxes by billions of dollars each year, Commissioner of Internal Revenue Fred T. Goldberg said Tuesday.
Income statistics and Internal Revenue Service examinations suggest that the companies are using false pricing techniques and other practices in transactions with parent firms to understate taxes, Goldberg told the House Ways and Means Oversight Subcommittee.
Rep. J. J. Pickle, (D-Tex.), chairman of the subcommittee, opened hearings into whether current law and size of the IRS staff are adequate to prevent cheating.
“Some of the companies investigated have been operating in the United States for years and have never sent a check to Uncle Sam for one thin dime,” Pickle said.
“They have failed to pay taxes despite the fact they have profited from selling billions of dollars of cars, motorcycles, stereos, televisions, VCRs, microwaves and other products to the American consumer.”
A nine-month investigation by the subcommittee’s staff of 36 foreign-owned U.S. companies found that more than half paid little or no federal income taxes at a time when they handled billions of dollars in gross sales.
IRS officials have said U.S. subsidiaries artificially inflate prices they pay their foreign parents to show low or no profits in the United States, thereby avoiding taxes. The practice is called transfer pricing.
The IRS said foreign companies operating in the United States chalked up $686 billion in U.S. sales in 1987. The companies’ U.S. subsidiaries paid $5.6 billion in taxes, 0.8% of receipts. U.S.-owned corporations paid slightly more than 1% of their receipts.
The companies, which sold automobiles, motorcycles, and electronics equipment, cited poor profit performance when paying little or no U.S. taxes, but the IRS was not convinced, the subcommittee staff said.
Pickle’s investigators found that:
* Over a 10-year period, more than half the foreign companies they investigated paid little or no U.S. income tax.
* One electronics distributor paid more than $150 million in taxes over six years. A second company, with similar products, assets, receipts and distribution networks, paid no tax. Both are U.S. subsidiaries of foreign corporations. The difference: transfer pricing.
* For tax purposes, one company sold television sets to an outside distributor for $150 but charged its own distributor $250. One foreign car maker charged its U.S. distributor $800 more than its Canadian distributor.
* Some foreign-owned subsidiaries have engaged in kickbacks and imposed illegal freight and insurance charges to avoid taxes.
* An electronics company grossed $4 billion over seven years but reported tax liability of only $15 million. The company paid no taxes for 10 years, the IRS said, because it used operating losses to get refunds of what little tax it had paid during profitable years.
The IRS said that while Japanese-controlled companies accounted for 27% of the receipts of U.S. subsidiaries in 1987, they paid only 21% of the taxes. British-controlled subsidiaries had 15% of the sales but paid 31% of the taxes.
