ETUDES FISCALES INTERNATIONALES

December 18, 2008

The Honorable Carl Levin

Chairman, Permanent Subcommittee on Investigations

Committee on Homeland Security and Governmental Affairs

United States Senate

The Honorable Byron L. Dorgan

United States Senate

Today, corporations operate in a global economy and most of the largest U.S. corporations have subsidiaries in other countries. Corporations have foreign subsidiaries for a variety of business reasons, including reasons related to taxes. For example, a corporation may establish a foreign subsidiary to take advantage of sales opportunities, natural resources, or favorable labor conditions.

In some cases, U.S. taxpayers aggressively interpret U.S. tax law relating to foreign subsidiaries.

For example, the Department of the Treasury (Treasury) has found that some U.S. corporations have aggressively set transfer prices1 to move income to offshore jurisdictions to avoid U.S. taxes.2 Some offshore jurisdictions have no or nominal taxes and are sometimes referred to as tax havens.

In addition, we previously reported that in 2004, for U.S. multinational corporations generally the share of business activities related to income that are more likely to be affected by income-shifting practices3 was significantly larger in countries with relatively low effective tax rates than the share of business activities that were least likely to be affected by

A LIRE AUSSI

 Report to the Congress on Earnings Stripping, Transfer  Pricing, and U.S. Income Tax Treaties (November 2007).

Levin-Grassley-McCaskill Bill Introduced to Stop Misuse of U.S. Companies

1 Transfer prices are the prices related companies, such as parents and subsidiaries, charge on intercompany transactions. These prices affect the distribution of profits between the two companies.

2 See Department of the Treasury, Report to the Congress on Earnings Stripping, Transfer Pricing, and U.S. Income Tax Treaties (November 2007).

3 Income shifting is transferring gross income from one taxpayer to another taxpayer in alower tax bracket or jurisdiction, thereby reducing the overall liability of the original taxpayer.