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The Obama administration's fiscal year 2010 budget contains several significant proposals for changing tax rules related to income from foreign sources. In a speech given in May 2009, President Obama linked these international tax proposals to the administration's goal of eliminating tax code provisions that "reward our companies for moving
Download Audio as MP3 jobs off our shores or transferring profits to overseas tax havens."
This conference examined various policy aspects relating to the taxation of multinational corporations, including the rules for locating profits abroad for tax purposes and what Internal Revenue Service data show about profit location. Panelists discussed whether formulary apportionment would reduce the auditing costs and other economic distortions associated with the current arm's-length standard. Participants also examined the way other countries have responded to the ability of international firms to transfer their income to lower-tax countries.
|8:45||Opening Remarks:||John Samuels, General Electric|
|Kevin A. Hassett, AEI|
|9:00||Panel I: International Location of Taxable Income: What Are the Issues?
|Presenter:||Irving Plotkin, PricewaterhouseCoopers|
|Discussant:||Michael McDonald, Department of the Treasury|
|Moderator:||Matthew Slaughter, Dartmouth College|
|9:45||Panel II: What Do Corporate Tax Return Data Show about Income Shifting?
|Presenter:||Rosanne Altshuler, Tax Policy Center|
|Discussant:||Kim Clausing, Reed College|
|Moderator:||James Hines, University of Michigan|
|11:00||Panel III: Efficiency Consequences of Using Formula Apportionment|
|Presenter:||James Hines, University of Michigan|
|Discussant:||Walter Hellerstein, University of Georgia|
|Moderator:||Alex Brill, AEI|
|11:45||Panel IV: How Should the United States Address International Income Shifting?|
|Panelists:||Steve Musher, Internal Revenue Service|
|David Rosenbloom, Caplin & Drysdale and New York University School of Law|
|Michael Devereux, Oxford University|
|Kim Clausing, Reed College|
|Moderator:||Rosanne Altshuler, Tax Policy Center|
American Enterprise Institute
WASHINGTON, JANUARY 11, 2010--In introducing the January 11 AEI-International Tax Policy Forum joint conference, John Samuels of General Electric stated: "I don't think there is a more important or more intractable issue in international tax policy today than trying to determine the source of income in transactions between related parties." The issue he described, known as transfer pricing, is a crucial but little understood policy issue. Experts from around the world met at AEI to develop a better understanding of the related issues and potential policy solutions, as well as to introduce breaking research.
To kick off the conference, Irving Plotkin of PricewaterhouseCoopers gave a short course on transfer pricing. Transfer pricing refers to how related entities price tangible goods, intangibles, services, and loans among themselves. With this price in hand, tax liability can then be allocated among various fiscal authorities. Plotkin instructed that transfer pricing is not an illegal practice but a "necessity of international trade where you have goods crossing taxable boundaries." The central issue discussed at the conference was how best to calculate price in order to offer fair taxation in various states or countries. The current transfer pricing rule in international tax policy is called the arm's-length standard (ALS). The ALS attempts to price a transfer between a subsidy and parent corporation the same as if they were unaffiliated and the transaction occurred in the open market. Even its advocates admit the rule has flaws, but they feel it is the best solution available. As Plotkin put it, choosing another standard is "like the king who had to give a prize to one of two singers and immediately gave it to the second after hearing the first."
In the second panel of the conference, Rosanne Altshuler of the Brookings-Urban Institute Tax Policy Center introduced new research she conducted with Alan Auerbach (University of California, Berkeley), Michael Cooper (U.S. Treasury) and Matt Knidle (U.S. Treasury). Altshuler's ongoing research attempts to identify income shifting: she and her coauthors have compiled data on multinational corporations to determine whether a shift in tax rates leads to a shift in location of taxable income. This research gets to the heart of some of the biggest issues regarding transfer pricing, since many people associate transfer pricing with illegal tax avoidance. Their research is preliminary but suggests a measurable shift in income away from high-tax countries. Altshuler's work will be a major boon for our understanding of international tax policy, and its completion is greatly anticipated.
James Hines of the University of Michigan presented his new research examining formulary apportionment, the "second singer" Plotkin warned of. His paper is based on the idea that "you can use simple statistics to estimate the reliability of alternative factor weights for formulary apportionment." Formulary apportionment is the most often discussed alternative to the arm's-length standard. It is the rule used for multistate corporations and U.S. states but has never been tried internationally. Essentially, it uses an equation to decide what portion of income is taxable in a given state based on how much of the firm's sales, employment, and capital occur in that state. These formulas, as Hines suggested, can never fully predict where profits are, but his research uses firm-level data to calculate the optimal formula. He finds that sales are the most effective indicator of profits, while labor weights are very ineffective indicators, but the optimal formula is only a slight improvement over most currently used formulas.
David Rosenbloom of New York University Law School, Michael Devereux of the Oxford University, Steve Musher of the Internal Revenue Service, and Kim Clausing of Reed College closed the conference by discussing how the United States should address income shifting. Rosenbloom identified the dichotomy between the arm's-length method and formulary apportionment. He suggested that we are "more or less stuck with the arm's-length method" because of the lack of an international authority and the potential for international double taxation. He recommended that we seek out "midway positions that would keep arm's-length, not go totally to formulary apportionment, and might be a heck of a lot more workable than what we have today." Devereux offered expert perspective on Europe, including the developments already underway there, while Musher and Clausing emphasized the importance of international cooperation in improving methods to deal with income shifting.
Rosanne Altshuler is a senior fellow at the Urban Institute and codirector of the Urban-Brookings Tax Policy Center. She is on leave from Rutgers University, where she is a professor of economics. She served as senior economist to the President's Advisory Panel of Federal Tax Reform in 2005 and has been a special adviser to the Joint Committee on Taxation as well as a consultant to the U.S. Treasury Department and Canadian Department of Finance. Ms. Altshuler has published numerous articles on the economics of taxation and edited the National Tax Journal from 2001 through 2006.
Alex Brill is a research fellow at AEI. Prior to joining AEI in 2007, he served for five years on the staff of the House Ways and Means Committee, where he was chief economist and senior adviser to the chairman. In this capacity, he led the staff in work on major tax, pension, trade, and health legislation and oversaw efforts to expand the analytical capability of the Joint Committee on Taxation's revenue-estimating process. In addition to providing legislative and policy counsel to the chairman, Mr. Brill advised committee members about the effects of various tax, trade, health, and Social Security proposals and general economic trends. Prior to his work for the committee, he served on the staff of the President's Council of Economic Advisers. Mr. Brill began his career in Washington as a research assistant at AEI. He studies a variety of tax policy issues and is also a Term Member at the Council on Foreign Relations.
Kim Clausing is the Thormund A. Miller and Walter Mintz Professor of Economics at Reed College. Her current research studies the taxation of multinational firms, exploring how international tax incentives affect international trade, government revenues, and the location of economic activity. Recently, she has worked on related policy research with the Hamilton Project, the Brookings Institution, and the Tax Policy Center. She teaches international trade, international macroeconomics, and public finance. From 2006 to 2007, Ms. Clausing served as an associate professor of economics at Wellesley College. During 1999–2000, she was a Fulbright research scholar in Brussels, Belgium. During 1994–1995, she served at the Council of Economic Advisers as a staff economist specializing in international economic policy.
Michael Devereux is a professor of economics at the University of Warwick, UK, and research fellow of the Institute for Fiscal Studies and the Centre for Economic Policy Research. His research interests are primarily concerned with the impact of different forms of taxation on the behavior of economic agents, in particular companies. This has involved both theoretical and empirical research on, for example, the impact of taxation on corporate investment and dividend policy, and the location decisions of multinationals. He has published widely in academic journals and has been closely involved in international tax policy issues in Europe and elsewhere. He has worked with the Organisation for Economic Co-operation and Development's Committee of Fiscal Affairs and the European Commission, in particular with the Ruding Committee and as part of the panel of experts used by the commission in developing its 2001 proposals for reform of European corporation taxes. He also serves as the Policy Watch editor of International Tax and Public Finance.
Kevin A. Hassett is the director of economic policy studies and a senior fellow at AEI. His research areas include the U.S. economy, tax policy, and the stock market. Previously, Mr. Hassett was a senior economist at the Board of Governors of the Federal Reserve System, a professor at Columbia University, and policy consultant to the Treasury Department during the George H. W. Bush and Clinton administrations. He also served as a top economic adviser to the George W. Bush and John McCain presidential campaigns.
Walter Hellerstein is the Francis Shackelford Professor of Taxation at the University of Georgia Law School. He is coauthor of the first two volumes of State Taxation and the author of more than one hundred journal articles. Mr. Hellerstein has practiced extensively in the state tax field and has been involved in numerous state tax cases before the U.S. Supreme Court, including successful arguments in Hunt-Wesson, Inc. v. Franchise Tax Bd. (2000) and Allied-Signal, Inc. v. Director, Div. of Taxation (1992). He serves as an academic adviser to the Organisation for Economic Co-operation and Development's Working Party No. 9 on Consumption Taxes. In 2008, Mr. Hellerstein was awarded the National Tax Association's Daniel M. Holland Medal for outstanding lifetime contributions to the study and practice of public finance.
James Hines teaches at the University of Michigan, where he is the Richard A. Musgrave Collegiate Professor of Economics in the department of economics and the L. Hart Wright Collegiate Professor of Law in the law school. He also serves as research director of the Office of Tax Policy Research at the Ross School of Business. He was on the faculties of Princeton and Harvard prior to moving to Michigan and has held visiting appointments at Columbia University; the London School of Economics; the University of California, Berkeley; and Harvard Law School. He is a research associate of the National Bureau of Economic Research, research director of the International Tax Policy Forum, and coeditor of the American Economic Association's Journal of Economic Perspectives, and long ago was an economist in the U.S. Department of Commerce.
Michael McDonald is a financial economist in the International Tax Division of the Treasury Department's Office of Tax Analysis, specializing in transfer pricing. He has worked on a number of transfer pricing initiatives, including the temporary and proposed cost sharing regulations (2005, 2009) and the intercompany services regulations (2003, 2006, and 2009). He is a U.S. delegate to Working Party No. 6 of the Organisation for Economic Co-operation and Development's Committee on Fiscal Affairs and has served as a delegate on a number of subsidiary working groups dealing with business restructurings and the attribution of profits to permanent establishments. Prior to joining the Treasury Department, Mr. McDonald was a transfer pricing economist in the National Tax Department at Ernst & Young from 1996 to 2001. From 1988 to 1996, Mr. McDonald was on the Revenue Estimating Division at Treasury's Office of Tax Analysis.
Steve Musher is the associate chief counsel (international) in the Office of the Chief Counsel of the U.S. Internal Revenue Service (IRS). Mr. Musher joined the IRS in 1994. Previously, he worked for sixteen years as an international tax specialist in the private sector. His prior affiliations were with the law firms of Cole, Corette & Abrutyn, a professional corporation of which he was a member, and Arnold & Porter.
Irving Plotkin is the senior managing director of PricewaterhouseCoopers's Tax and Economic Controversy practice and a member of its National Tax Service based in Boston. He is one of the premier experts in the field of transfer pricing and other complex domestic and international tax issues such as economic substance, financial products, and insurance. He specializes in analyses of the effects of various types of government regulation, self-regulation, and taxation on capital flows, output, prices, risk taking, competition, and efficiency within individual industries. His work on risk/return measurement and on international and domestic tax issues is widely cited, as is his expert testimony on behalf of U.S. and foreign taxpayers, the Internal Revenue Service, and Department of Justice in many high-profile and precedent-setting tax disputes. He has designed, directed, and published research involving microeconomics, finance, industrial organization, and econometrics. He has presented the results of these studies before several U.S. Senate and House committees; the Federal Reserve Board; the Interstate Commerce Commission; the Federal Maritime Commission; the Federal Trade Commission; U.S. Claims, Tax, and District Courts; and numerous state legislative committees, courts, regulatory agencies, and arbitration panels. He has also assisted in the writing of international tax legislation and regulations. Mr. Plotkin has served as an editorial reviewer for the Journal of the American Statistical Association, the Journal of Industrial Economics, and the Journal of Risk and Insurance. Mr. Plotkin's comments on current tax developments appear frequently in The Transfer Pricing Report.
David Rosenbloom became director of the International Tax Program at the New York University School of Law in 2002. He is a member of Caplin & Drysdale, Chartered, a law firm he rejoined in 1981 after serving from 1978 to 1981 as international tax counsel and director in the Office of International Tax Affairs at the U.S. Treasury Department. Mr. Rosenbloom served as assistant to Ambassador Arthur Goldberg at the U.S. Mission to the United Nations and then as clerk to U.S. Supreme Court Justice Abe Fortas. A frequent speaker and author on tax subjects, Mr. Rosenbloom has taught international taxation and related subjects at Stanford, Columbia, the University of Pennsylvania, and Harvard law schools and at educational institutions around the world. He has also served as a tax policy adviser for the U.S. Treasury, the Organisation for Economic Co-operation and Development, the U.S. Agency for International Development, and the World Bank in Eastern Europe, the former Soviet Union, Senegal, Malawi, and South Africa.
John Samuels is General Electric's (GE) vice president and senior counsel for tax policy and planning. He is responsible for GE's worldwide tax organization and for the company's global tax planning and tax compliance operations. He is a member of GE's Corporate Executive Council, the GE Capital Corporation Board of Directors, and the GE Pension Board. Prior to joining GE in 1988, he was a partner in the law firm of Dewey, Ballantine in Washington, D.C., and New York City. From 1976 to 1981, Mr. Samuels served as the deputy tax legislative counsel and tax legislative counsel of the U.S. Department of the Treasury in Washington, D.C. Mr. Samuels is the chairman of the International Tax Policy Forum, a fellow of the American College of Tax Counsel, a trustee of the American Tax Policy Institute, and a member of the University of Chicago Law School Visiting Committee. Mr. Samuels was an adjunct professor of taxation of New York University Law School from 1975 to 1986 and currently is a visiting lecturer at Yale Law School, where he teaches courses in U.S. international and corporate taxation.
Matthew Slaughter is the associate dean of the MBA program and the Signal Companies Professor of Management at the Tuck School of Business at Dartmouth, where he codirects Global Leadership 2020, the flagship executive education program. He is also currently a research associate at the National Bureau of Economic Research, a senior fellow at the Council on Foreign Relations, an academic adviser to the McKinsey Global Institute, and a member of the academic advisory board of the International Tax Policy Forum. From 2005 to 2007, Mr. Slaughter served as a member on the Council of Economic Advisers in the Executive Office of the President. In this Senate-confirmed position, he held the international portfolio, advising the president, the cabinet, and many others on issues including international trade and investment, currency and energy markets, and the competitiveness of the U.S. economy. He has also been affiliated with the Federal Reserve Board, the International Monetary Fund, the World Bank, the National Academy of Sciences, the Institute for International Economics, and the Department of Labor. Mr. Slaughter's area of expertise is the economics and politics of globalization. His current research is examining how multinational firms can best structure their global operations; the labor-market impacts of international trade, investment, and immigration; and the political economy questions of voter attitudes about and government policies toward globalization. Mr. Slaughter has published dozens of articles as book chapters and in peer-reviewed journals; he has coauthored and coedited three books, including Globalization and the Perceptions of American Workers, and has served and currently serves in editorial positions for several academic journals.