Senator LEVIN. He would have settled for the Attorney. Senator DORGAN. He probably would probably tional Tax Attorney, that is right. Senator LEVIN. It's going to happen. Senator DORGAN. I thank all of you for being h to advise all of you that your entire statements of the permanent hearing record, and we will a rize them for us. Let me call first on Dan Bucks, Executive Dire tate State Commission. Mr. Bucks. TESTIMONY OF DAN L. BUCKS,1 EXECUTIVE MULTISTATE TAX COMMISSION, WASHI Mr. Bucks. Mr. Chairman and members of the you for this opportunity to testify. I am Dan Bucks, the Executive Director of t Commission, which is an organization represent develop rules for States to use in dividing the in operating across State and national boundaries, real world experience in auditing corporations fo We want to commend you, Senator Dorgan, f hearings, which are directed at one of the grea Federal policy failures of the last 30 years, the the proper reporting for tax purposes of incom corporations within the U.S. As a former State tax commissioner and forme mission, you understand this problem thoroughl your leadership on this issue. My messages today is simply that the Federal proach to dividing and taxing the income of glo doomed to fail, and that, in effect, the emperor is in serious need of being saved from his own en The Federal Government is wearing an imagin called "arm's length pricing adjustments." No largely unworkable and wastes scarce Federa sources. Worse yet, it fails to collect the tax reve ed and causes real economic harm by shifting t fairly to small businesses that are the main eng in America. 1 The prepared statement of Mr. Bucks appears on page 73. heir fair share. And States also care, as well, about this issue, se many of us believe that the States have already discovered lution to this problem in the form of formula apportionment. › Federal Government's arm's length pricing efforts are ineffias compared to the formula apportionment method that s use to divide international income among different jurisdic indicated on this chart that is displayed here, the Federal rnment spends, at a minimum, at least three to seven times as staff-hours completing a partial international arm's length as compared to the hours that the States spend on a complete national formula apportionment audit. w, this comparison actually understates the greater efficiency e States' approach, because we are actually comparing here est case scenario the Treasury and IRS have reported with the case scenario of the States, as I explain in greater detail in ritten testimony. w, does using three to seven times as much staff time as the s yield better results? Sadly, the answer is no. The Internal nue Service has failed to sustain its transfer pricing adjusts in every major case it has taken to court in the last 10 . The record here is a perfect record of failure in court. I am riticizing the IRS here, for they have dedicated and talented working on these issues. e problem is that the arm's length pricing system largely ims success. The fault lies with the policy, not with the service. g badly in court, the IRS has turned to settling a large porof transfer pricing cases, and in 1981 it settled those cases for verage of 23 cents to 28 cents on the dollar. In contrast, the s have won the bulk of their international cases. w, please note that the States that are among the smallest in Nation, such as North Dakota and Montana, have succeeded in nistering an international apportionment system, when the ral Government has failed to make arm's length pricing work. v, the Federal Government in the mid-1980's pressured these other States to limit their use of international apportionment. w, why is the Federal Government spending so much and ving so little? Essentially, it is because the Federal arm's h pricing method attempts to do the impossible. It is impossibecause the shear volume of trade between related jointly d corporations is too great to police on a transaction-by-transn basis. There are 46,000 global corporations operating in the ed States, doing $350 billion worth of business just amongst elated corporations within their own families. is issue, covered onment. e ineffi od that jurisdic Federal times as s length complete fficiency ing here with the detail in e as the Internal g adjuste last 10 urt. I am talented rgely ime service. arge porcases for trast, the mallest in ceeded in when the cing work. red these tionment. much and eral arm's is impossi ed jointly n-by-transing in the t amongst these cases. What we have is an approach to internationa inefficient, ineffective and is doomed to fail. So with a method that has failed so badly for ov reason given time and again by Treasury official makes us do it." And who is the devil in this d tax treaties. But is that a reasonable answer? No should require anyone to do that which is imp they should be changed. Further, and this is very important, the maj speak of adjusting prices to an arm's length le what the treaties speak of is adjusting profits achieves an arm's length result. Treasury could, without revising the treaties, explore with other veloping formula apportionment processes_that stead of prices. Indeed, one can argue that Treas responsibility to do just that. Thirty years go, the U.S. Government led its down the arm's length pricing path. We now k reached a dead end, and it is time for the through Treasury, to lead its trading partners d dividing profits through formula apportionment. The Federal Government is parading naked in tax arena. It is time for this emperor to get a will not find a good suit of clothes in London, E Tokyo, and he will certainly not find them in th or Netherlands Antilles. The emperor will fir clothes in Sacramento, Salem, Helena, Boise, a when he finds this suit of clothes, he will disc well, they are warm and comfortable, are a g money, and will last a long, long time. Thank you very much. Senator DORGAN. Mr. Bucks, thank you very m Next we will hear from Phil Aldape-and I I your name right-Division Manger, Idaho State Boise, Idaho. Mr. Aldape, am I correct? Mr. ALDAPE. Aldape. Senator DORGAN. Aldape, close. Thank you for མས པ་ སམསྡབv mpanies. here today to tell you about our experience with Section 482 try to compare it to formula apportionment. We have had gnificant experience with a Section 482 audit. It involved the er of 100 percent of the stock of a subsidiary of an Idaho cor on which was in the oil and gas business and had properties hout the United States. That stock was transferred from the corporation to its parent, which was based outside the State ed upon a prior agreement that the Tax Commission had en into with the Idaho corporation, we were obligated to use the te entity method of accounting and, as a result, had to use ction 482 approach to determine, first of all, the fair marke of the stock that was transferred out of state and the gair nould have resulted from that transaction, since the taxpayer ed no gain in the return as filed. ur audit, we experienced considerable resistance from the ver. We ran into a considerable amount of confusing and con g data in their records and we spent weeks researching in publications to try to determine how to go about valuing ock. We ended up conducting two appraisals, one by a CPA xperienced auditor on our staff who used a comparable sale ach for determining that value, and another by two senior ap rs in our ad valorem and estate tax audit units. They value oven and probable reserves of that oil and gas subsidiary, t mine the amount of the value and the gain that should hav eported. se two appraisals determined values ranging between $1 6 million, that is gains that should have been reported of $1 million. And following our appraisal, the taxpayer felt obli to do one of his own. Their appraisal acknowledged that the hould have been $8 million, where none was originally re s case progressed and we ultimately settled while we were i ocess of pending litigation. We had planned to hire an exper an appraisal to support our audit. We expected from the in tion we had that we would have had to pay $50,000 to $75,00 is expert witness. We were told that we needed to do this, i pected to win the case, because in valuation cases such a he winner is typically the party with the most credible wit it was, we spent 2,000 hours on this case, compared to ap nately 200 hours that we typically spend on apportionmen prepared statement of Mr. Aldape appears on page 86. be manipulated by less than arm's length pricin are two methods of combined reporting or formu The first is one that may be elected by the taxpa a waters edge method. Under this method, there boundaries between U.S. and foreign operations, opportunities for taxpayers to give us arm's ler lems. We, unfortunately, have to rely upon the IRS, pleased to do that by comparison to nothing, w cause of the difficulties that they have with Secti companies are likely paying us less than they sho The worldwide combined reporting approach, among taxpayers in Idaho, is a better approac There are no arm's length issues to deal with in includes only income that results from transactio entities. Mr. Chairman, we urge you and your colleague apportionment concepts that the States have suc years for the arm's length approach or, in th modify Section 482 to use formula apportionmen length method doesn't work. We think that the at the Federal level will ease compliance, make re ifiable and improve equity among all taxpayers. Thank you for the opportunity to speak to you. to answer any questions. Senator DORGAN. Mr. Aldape, thank you very m Next, we will hear from Mr. Benjamin Mille Counsel, the California Franchise Tax Board, in S Mr. Miller. TESTIMONY OF BENJAMIN F. MILLER,1 ASSOCIA CALIFORNIA Mr. MILLER. Thank you, Chairman Dorgan. My name is Benjamin F. Miller. I am an attorn of California, and I am here representing the Fra and its executive officer, Gerald H. Goldberg. asked me to convey his greetings to you, he share er positions with you at one time, and to expres not being able to be here with you today. He had 1 The prepared statement of Mr. Miller appears on page 92. |