es limited success in squeezing so tax dollars from foreign corpora as raised serious doubts about one Entical underpinnings of Presidentill Clinton's economic plan. Clinton has said he can raise as s $45 billion over four years by more sly enforcing the tax laws against companies. But the IRS began such orcement effort several years ago, poor success rate to date suggests Clinton may find it impossible to ven close to his goal. ere is no way, no chance, none, zero u are going to get $45 billion," Fred rg. the Treasury Department's assecretary for tax policy, told a Of tax experts in San Diego earlier ek. The money is just not there." Efforts Cited be sure, the IRS has tried. Just Hay, Matsushita Electric Industrial d it had signed a pricing agreement e IRS one of a handful of such recently negotiated by the tax or to try and ensure foreign compamy their fair share. The IRS also posed new regulations that conceiv uld help the government wrest more from foreign-owned companies. so far, such efforts have yielded ely little. Even supporters of Mr. 's pledge to be tougher on foreign ties doubt that he can come up with money he says he can, given the rack record in this area. "I don't e's going to get anywhere near $10 a year." says James Wheeler. sor of accounting at the University gan's business school. Issue is critically important for inton. who ambitiously promised the election campaign that he institute a number of costly new ms. bring down the budget deficit taxes for the middle class. all at the me. In campaign appearances, the as governor repeatedly said that to . he would have to raise taxes wealthy people and foreign corpo $45 billion he said he would raise oreign corporations accounts for 3% of his total increase in taxes. If oney fails to materialize. it will increase pressure on the new presi either sharply reduce his spending ms. increase the deficit, or raise xes. Clinton's plans rest largely on into an area known as "transfer which refers to the amount that a my charges its affiliates for products ces. standard for such exchanges is, on simple enough: The transfer price is supposed to be "arm's length" — that is, the same price at which the product would have been sold to an unrelated, third-party buyer. But by manipulating the price of goods sold between an overseas parent and its domestic operations, a company can artificially decrease the amount of income it earns on U.S. soil and lower its tax burden to Uncle Sam. When it suspects such an abuse, the IRS tries to go in and collect the difference. But companies-both U.S. and foreignowned have been challenging the IRS. and defeating the agency time and again. A study completed in June by the General Accounting Office, for example. found that of the transfer-pricing cases involving foreign companies that went through the IRS's internal appeals process from fiscal 1987 through 1980, the govern ment came away with only 25.5% of the total $757 million it was seeking. The GAO further found that in cases involving seven of the eight foreign companies with the largest proposed transfer pricing adjustments, the IRS won less than 15% of what it contended it was owed. "We have not done well on these cases," acknowledges Ellen Murphy, an aide to IRS Commissioner Shirley Peter son. When matters have gone as far as the courtroom, the results also have been running against the government. In fact, the two big transfer-pricing cases litigated most recently, involving Merck & Co. and a Nestle S.A. unit, were decided completely in the taxpayers' favor. Even in earlier cases, where the court found the government's position more compelling, companies have been able to persuade the judges that if their transfer prices weren't correct, they've been nowhere near as wrong as the IRS has contended." says Philip Morrison, who served as the Treasury Department's international tax counsel until June. Now, Clinton administration could suddenly expect to fare much better. That's especially true given that Mr. Clinton's advisers have indicated privately that the president-elect doesn't intend to put new transfer-pricing laws or regulations into place. Mr. Wheeler believes that without an overhaul of the rules on the books, the IRS isn't likely to be more successful in transfer-pricing cases, even if Mr. Clinton throws more resources at the problem. For his part, Mr. Goldberg says hiring more IRS examiners for transfer pricing cases would actually cause the government to lose money for three years while they were being trained. Widespread Cheating Suspected Mr. Clinton's promise to start "crack. ing down on foreign companies that prosper here and manipulate tax laws to their advantage" has been a source of contro very ever since his economic blueprint was first published in June. Some lawmakers and a few academics say they have little doubt that a tremendous amount of cheating by foreign corporations goes oneven far more than Mr. Clinton thinks. But many more economists say the $45 billion figure is greatly overblown. Ms. Peterson, the IRS commissioner, told a House panel earlier this year that the "tax rap" fro ansfer pricing abuses by foreign companies is, at most, about $3 billion a year. She also asked that certain tools Congress has given the IRS in recent years to combat the problem be given adequate time to work. FOREIGN companies do not vote in presidential elections. So, when the Democrats needed to propose at least one hefty tax increase to make their campaign promises more fiscally respectable, guess who made an easy target. Now Bill Clinton has won, the target can probably relax. Finding a pretext for stiffer taxation of foreign companies was not hard: accountants toil day and night to help treasurers book profits where tax rates are lowest, and that does not mean America. Clamping down on such abuses of transfer pricing, claimed Mr Clinton, might be worth extra tax revenues of $45 billion over four years. Members of the House of Representatives' Ways and Means Committee began bandying round an even higher estimate during the summer. But by then the Internal Revenue Service (IRS) had already come up with much lower figures of its own. It found that, as is often alleged, foreign-controlled companies typically show a lower return on assets than American companies (about 0.6% compared with 2.9%). Even assuming that as much as half of the difference reflects the shifting of profits through transfer pricing (as opposed, say, to a greater proportion of expensive new assets on which returns must be earned), and assuming that all of this could be identified and disallowed, the IRS suggested a yearly revenue boost of $3 billion might be something of a coup. That would compare with a total tax bill of $5.8 billion paid by foreign-owned American companies in 1988, the latest year for which published returns are available. Creators: harsh them, as well a against America A governme ing the jobs m growth ought to in favour of inw this will help Br USAir, the cou line, is harder to can carriers, wh Mr Clinton wi hedged his pub that others are n on the regulator resume on Nove Nowhere, the skills at obfuscat than in trade. He plus for foreign America: they co inside the Nort Area. The leadin NAFTA-bosses James Robinson Kay WhitmoreClinton is a stro Mr Clinton will he, and not the n of trade policy. from Dan Rostenkowski. That is the House Ways and Means Committee's estimate of the extent to which foreign corporations "cheat" on their U.S. taxes. Mr. Clinton has swallowed the idea that foreign firms routinely "overcharge" their U.S. subsidiaries for parts shipped from home base in order to reduce their reported earnings. Never mind that the IRS has conducted extensive audits of foreign firms and come up dry. Or that such abuses, if they did exist, would merely shift profits to the home country, where tax rates are generally higher. Tax "fairness," in Clinton's view, requires assuming that foreign companies earn money on their U.S. operations at 75 per cent of the rate earned by their U.S. competitors. If, for example, U.S. computer manufacturers averaged a 10 per cent profit on sales, a foreign computer maker selling $100,000 worth of computers would be forced to declare profits of at least $7,500, whether the company actually made money or not. But Governor Clinton balances his attack on for eign investment with an attack on U.S. investment abroad. Foreign subsidiaries of U.S. firms would no longer be allowed to defer taxes on foreign profits that are reinvested. Mr. Clinton apparently thinks that the best way to keep U.S. capital in the U.S. is to limit profit opportunities abroad rather than increase opportunities at home. Messrs. Smoot and Hawley would have agreed. The U.S. economy benefited from a record inflow of foreign capital during the Eighties; millions of Americans owe their jobs to foreign entrepreneurs. Profit rates for foreign-owned operations in the U.S. are indeed lower than for comparable domestic investment, but this reflects the enormous costs of starting operations in a foreign country-not tax cheating. The Clinton people know all this. Their “plan” for foreign investment is protectionism, pure and simple. But it is hard to see which special-interest groups will benefit. Not American-owned operations abroad, which would rightly fear retaliation; and not the about-to-be-unemployed Americans currently working for foreign companies. dollars in taxes owed by foreign-controlled companies would tap into one of the richest, but also one of the most elusive, potential sources of new reve nue available to the Government. By aggressively enforcing existing tax laws, the Democrat would stop international corporations from avoiding taxes by shifting their profits overseas. He says he could raise $45 billion this way in four years. If his figure is wrong, one of the pillars of his plan to cut the Federal deficit will be seriously undermined. Mr. Clinton's proposal is central to his dispute with President Bush over whether a Clinton Administration would have to raise income taxes on middle-income voters. Mr. Clinton says much of the revenue he plans to collect would come from corporations. Shifting Profits Overseas At issue is a device used by compames that operate both in the United States and abroad. By paying inflated prices for products purchased from its overseas unit, a domestic company can artificially inflate its costs in the United States, which keeps its profits-and therefore its taxes in this country to a minimum. Under international tax rules this is illegal. Even related companies are supposed to price their transactions as if they were unrelated. But it is not easy for tax auditors to prove viola; tions. The Clinton campaign points out that in 1988, foreign-controlled domestic corporations took in $825.6 billion in receipts but kept profits low enough that they paid only $5.8 billion in taxes. Mr. Clinton's program promises to increase the tax collections from these companies by $45 billion over a fouryear period. His advisers say that that is a relatively modest target and that they seek anly to collect what is due under existing laws. the states, too, would reap billions of Could Aflect U.S. Companies A plan to get more tax revenue out of foreign Many states base the taxes on how much a co the Federal Government. that foreign-owned com avoiding $30 billion a year taxes, the states are proba out on $7 billion a year-m annual Federal aid to the mass transit programs. "This is probably the la fiscal problem in the Uni said Dan Bucks, executivo the Multistate Tax Commi partisan organization of agencies. “i don't know issue that involves such hi of money." The $30 billion estimat lished by the House Ways Committer, is described t tee staff member as a re park" figure. It was based ny by an I.R.S. official w lyzed data on profits of companies. The sampling foreign-controlled compa tently reported far less på mestic compames engage rable businesses. The off ed what tax would be uwe were comparable. Widely Accepted Es Not only Congressional but many Republican lay Critics, including Bush Administration officials, argue that Mr. Clinton's goal is too ambitious and that collecting more taxes would discourage foreign investment in the United States. But it is hard for the Administration to Clinton campaign's revenue target criticize Mr. Clinton's proposal 100 might well be achievable. strongly, since the Internal Revenue Because tax avoidance is by defincluding Senator Jesse He Representativ Service is already pushing hard to col-tion hidden, it is exceptionally difficult Carolina, to estimate how much money might be available from foreign-owned compaStates, Tea, Would Benefit nies. The range of estimates runs from Even before it became a matter of $3 billion a year to $30 billion, with the Presidential politics, the problem 'Clinton proposal assuming that the vexed tax officials seeking better en- truth lies somewhere in the middle. forcement methods. Legislation introdured this year proposed, in effect, to set a minimum tax on the business done by international compames. And lect more of these taxes. posed regulations addressing how in pried. 'Huge Amounts of Money' Hunter of California, and fonse M. D'Amato of Nev accepted the $30 billion f Subsequent studies by accountants have sugges lower profits reported by panies are due largely t factors like exchange rat efforts to increase mark differences in the historic The President has repeatedly said the Internal Revenue Service has pro : $150 billion over four years, an amount low depreciation of assets Mr. Clinton plans to increase taxes by tangibles like software should he that Mr. Bush says could hardly be Even so, Tax Notes In collected by taxing only wealthy indi-respected trade publicat Both the legislation and the regula-viduals. In fact, the Clinton economic that the United States tions have met with resistance from plan propuses to collect $91.7 billion currently considering foreign nations and from companies billion by "closing corporate loop States and foreign comp from wealthy individuals, plus $5K 3) which the IRS is claimin that favor the status quo. But other new holes," including tax avoidance by for-billion because of improp approaches, like arbitration, are geteign-owned companies. ting favorable reaction. Though enforcing tax laws on corpo ing Meanwhile, some aspects of the ClinAnd in 1989 alone, the i. ten program are rarely if ever mentions would seem to be a pohtically toned: that it would presumably also appealing policy, the Clinton camp has tax adjustments of $500 n increase tax collections un American! evidently decided to focus its campaign! foreign companies companies that use the same trick to: Promises un foreign companies, whose : against American comp shield profits from taxation, and that owners have less political clout kind of tax avoidance on campaign began sting this 30-second cial in select markets The campaign give specifics about will appear. CREEN Opens with ers on a white screen nouncer says, "This is billion question." video of foreign cars the boat after shipese words appear on the screen: "Foreign ons in U.S. took in $825 S Bulletin, 4/8/92." Odime rolling. Cuts to President Bush , with these words osed: "Supports tax s for foreign companies en, "Attacks Bill Clinton ng to close them. Bush 8/27/92." mages of Mr. Clinton ator Al Gore. etters on a black and: "Clinton/Gore. For For a Change." TELEVISION SCRIPT Announcer: "This is the 825 billion dollar question. That's how much foreign corporations operating in the U.S. took in one year. But 72 percent of them didn't pay a dime in taxes. "Not one dime. And George Bush supports tax loopholes for foreign companies operating here. Supports them so much that he attacks Bill Clinton for wanting to close them. "Bill Clinton wants to collect what foreign corporations owe and put the money to work to rebuild America. "Clinton/Gore. For people, for a change." ACCURACY Raw figures cited are accurate. Bush campaign contends that many foreign corporations did not pay taxes because they did not make a profit. But Democrats counter that foreign companies would not operate here if they were not somehow benefiting financially. The ad also does not reflect the Republicans' position that international investment and open markets are in this country's best interest. What the Clinton campaign calls "loopholes" the Bush campaign describes as "tax incentives." SCORECARD As the Clinton campaign emphasizes the sour economy as the main issue in this election, the image of foreigners not paying their fair share is a powerful one. Republicans attack the ads as playing on xenophobia in the electorate. RICHARD L. BERKE |