Transfer Pricing - The corporate equivalent of secret individual offshore accounts

Jesse Drucker, writing for Bloomberg, reported a complicated transfer pricing scheme involving Forest Lab's Lexapro. The strategy shifts dollars from American sales of the blockbuster drug to other countries where tax rates are lower than in the US. Drucker estimates that corporate transfer pricing strategies, like this one involving Lexapro, enable thousands of companies to avoid paying $60 billion per year in US tax revenue.

Transfer pricing schemes involve the overpricing of imports and/or the underpricing of exports between related companies in different countries for the purpose of transferring profits or revenue out of the United States in order to evade taxes. The profits and revenue end up in a country that has a lower corporate tax rate than the US.

US Senator Carl Levin of Michigan has been a long time foe of transfer pricing schemes and has been quoted as saying they are "the corporate equivalent of the secret offshore accounts of individual tax dodgers." Levin introduced the Stop Tax Haven Abuse Act in March 2009. The bill allows US tax and securities agencies to treat non-publicly traded offshore entities as being controlled by the US taxpayer who formed them, sent or received assets to them, or benefited from them, unless the taxpayer proves otherwise. Despite strong support from the Obama administration, the bill has yet to pass. Critics of the bill say transfer pricing requires a mult-lateral fix, and the bill's US-centric focus will likely not be successful in remedying the problem.

In the meantime, reports Drucker, Forest Laboratories is employing a "Double Irish" corporate structure to transfer some of the revenue from Lexapro to Ireland, Amsterdam, and Bermuda to show profit from Lexapro in those countries as opposed to the United States, the country where the product is being purchased. Tax savings for Forest are significant. If the profit from Lexapro is reported as US income, the profit could be subject to the US corporate tax rate of 35 percent. In Ireland, the corporate tax rate is between 10% and 12.5%.

To read Jesse Drucker's article, click here.