Foreign Firms Could Find IRS Tougher if New Tax Laws Pass
Matsushita Electric Industrial Co., Sony Corp. and other big foreign corporations doing business in the United States are likely to face closer scrutiny by the Internal Revenue Service under proposed changes to federal tax law.
According to congressional sources and others, any final version of the deficit reduction package now before Congress will probably give the IRS broader authority to examine the records of foreign corporations doing business in the United States and extend the statute of limitations on underpayment of U.S. taxes.
George N. Carlson, a Washington-based economist with the accounting firm Arthur Andersen & Co., called the likely changes significant. Congress is “reacting to a perception that foreign companies, and particularly the Japanese, aren’t paying enough tax,” he said.
Last July, IRS officials told the oversight subcommittee of the House Ways and Means Committee that they were investigating underpayments totaling at least $13 billion by several hundred foreign corporations doing business in the United States. The oversight subcommittee, in its own investigation of 36 big, foreign-owned U.S. units, most of them Japanese, determined that more than half paid little or no tax in the past decade.
Federal tax investigators have long complained that foreign companies transfer goods to their U.S. units at prices high enough to prevent them from showing a taxable profit.
Rep. Duncan Hunter (R-Coronado), chairman of the House Republican Research Committee, recently identified 17 major Japanese corporations that the IRS is reportedly investigating for underpayment of taxes, including the U.S. units of Matsushita, Sony, Hitachi Corp., Toyota Motor Corp., Nissan Motor Co. and Sumitomo Bank Ltd.
Hunter, who has crusaded for changes in the tax laws for more than a year, said foreign corporations have an unfair advantage over their American counterparts. Hunter counts the Japanese as the biggest offenders by virtue of their meager tax payments.
“The average Japanese corporation declared taxable profit of a little more than one-tenth of 1%,” Hunter said. “Foreign corporations, by getting away without paying U.S. taxes, are able to out-compete their American counterparts by virtue of their evasion. If they had to pay taxes, they obviously would have less cash with which to buy up America.”
The IRS, as a matter of policy, declined to comment on the tax investigation other than to confirm that it is ongoing.
Officials of several Japanese companies, however, maintained that they have obeyed U.S. tax law.
“We are audited annually, and we’re in full compliance,” Steve Burke, a spokesman for Sony’s U.S. operations, said Thursday.
The tax changes under consideration would strengthen the IRS’ ability to enforce underpayment claims against foreign companies doing business in this country.
One such provision, included in a tax package approved by the Ways and Means Committee on Wednesday, would require any foreign company doing business in the United States to maintain records in this country and make them available to the IRS. The companies would also be required to designate someone in this country to receive a summons from tax authorities.
IRS officials have complained in the past that they often don’t have access to records kept abroad by foreign corporations and don’t have staffing to conduct investigations outside the United States.
Under another provision, the current three-year statute of limitations on tax underpayments by such companies could be extended under certain circumstances. Penalties for noncompliance with demands for records will also be substantially increased.
Officials of both Sony and Hitachi declined to comment on the possible changes.
“Since our dispute with the IRS is ongoing, we can’t disclose detailed information. But Hitachi has paid substantial taxes” in the United States, said Charley Naito, a Hitachi spokesman.
Matsushita executives didn’t return a call seeking comment. Japanese press reports have said the IRS has so far demanded about 10 million yen, or $78 million, from Matsushita.
Matsushita, which already receives about one-sixth of its $44 billion in annual revenue from U.S. sales, is currently in talks to buy Hollywood’s MCA Inc. for as much as $8 billion.
But it doesn’t appear likely that ownership by Matsushita would significantly change MCA’s tax status, since most of the disputed payments concern internal pricing by foreign corporations of goods produced abroad and sold to the U.S. units for resale to consumers.
The issue may be of deeper concern to government officials than company executives, since taxes paid here, in the case of Japanese companies, are generally deducted from payments by the parent corporations.
