The House Ways & Means Committee holds a hearing today on Transfer Pricing Issues. From the hearing announcement:

The United States has a global system of taxation such that domestic corporations are taxed on their worldwide income, although the foreign tax credit prevents double taxation. Active foreign business income can be eligible for deferral from current taxation, subject to certain rules, until the earnings are repatriated to the United States.  One set of rules in the Internal Revenue Code applying to multinational corporations is the transfer pricing rules, which applies to both domestic and foreign corporations (§ 482).  Transfer pricing is the price one company charges a related entity for the transfer of goods or services.  The principle measurement used in determining whether the price is appropriate is the arm’s length standard, as if the transferring party was unrelated to the transferee.  The Code permits the IRS to adjust deductions or credits between affiliated entities in order to prevent the evasion of taxes.

U.S. multinationals have continued to grow in the global marketplace, which poses greater challenges for the tax enforcement agencies.  In 2004, the Ways and Means Committee requested the Treasury Department study the effectiveness of the current rules on transfer pricing to “ensure that income is not being shifted outside of the United States.” (H. Report 108-458, enacted as part of the American Jobs Creation Act of 2004, Pub. L 108-357).  In 2007, Treasury reported on the effectiveness of the regulations, rules, and compliance efforts and did find some potential for income shifting, particularly with respect to cost-sharing arrangements involving intangibles. (Report to the Congress on Earnings Stripping, Transfer Pricing, and U.S. Income Tax Treaties, U.S. Department of Treasury, November 2007). Treasury recommended specifically that the rules and regulations be revised and updated.

More recently, the President’s FY 2011 budget proposal contained two proposals on transfer pricing, citing “evidence indicating that income shifting through transfers of intangibles to low-taxed affiliates has resulted in a significant erosion of the U.S. tax base.” One proposal would tax excessive returns when intangibles are transferred from the U.S. to a related entity in a low-tax jurisdiction.  The other would broaden the definition of intangible property for purposes of § 367(d) and § 482 and provide the IRS would greater authority in making valuations.

The transfer pricing rules have been updated and modified many times over the last decade, yet still foster controversy.  Pursuant to these concerns, the Committee requested that the Joint Committee on Taxation (JCT) study and report back on the issue of income shifting and transfer pricing.  As part of background material for the hearing, the JCT will provide a summary of ongoing work, containing a discussion of the issues as well as case studies, which will be a focus of this hearing.

The Joint Committee on Taxation has released Present Law and Background Related to Possible Income Shifting and Transfer Pricing (JCX-37-10):

This document … includes a background discussion of business restructuring, a description of past and present law relevant to the studies, and six case studies of U.S.-based multinational corporations and how the business structure of those corporations interacts with the Internal Revenue Code to determine the corporation’s U.S. tax liability.

Here are the witnesses scheduled to testify:

• Stephen E. Shay (Deputy Assistant Secretary for International Tax Affairs, U.S. Treasury Department)
• Tom Barthold (Chief of Staff, Joint Committee on Taxation)
• Martin A. Sullivan (Tax Analysts)
• R. William Morgan (Managing Director, Horst Frisch Inc.)
• Reuven Avi-Yonah (Professor, University of Michigan School of Law)
• James R. Hines Jr. (Professor, University of Michigan School of Law)