Tax crackdown windfall or hot air? Foreign firms say Clinton's $45 billion claim is exaggerated, risky

December 27, 1992|By Ian Johnson | Ian Johnson,Staff Writer

NEW YORK -- Are foreign-owned companies the deadbeat dads of the U.S. tax system?

They certainly are if you believe President-elect Bill Clinton, who is counting on raising $45 billion over four years for his social programs by cracking down on foreign companies.

The companies, however, tell a different story. Although nervous -- and silent for fear of attracting more attention from the incoming administration -- they remain certain that Mr. Clinton's proposal is exaggerated and based on shaky numbers, a claim buttressed by many tax analysts and Internal Revenue Service figures. The companies also hint that if Mr. Clinton's plan is enforced, it could cause a backlash against U.S. companies with overseas operations.

"I don't think the numbers are close to reality. They're way off the mark, without any question," said Stanley Sherwood, an international tax analyst at the accounting firm Coopers & Lybrand.

The International Chamber of Commerce also questions Mr. Clinton's plan. The group warned Dec. 18 that his proposal to get more tax revenue from foreign companies by closing alleged loopholes raised "the serious risk of increased double taxation and distortions to cross-border trade and investment."

Clinton advisers disagree. "Our best analysis is that the estimates we put out [$45 billion in new taxes over four years] are realistic," said Robert Shapiro, chief economic theoretician for the Progressive Policy Institute, a think tank associated with the Democratic Leadership Council.

Coming up with this money is important for the Clinton administration because it would pay for up to one quarter of promised spending on new domestic programs. And unlike other tax increases, this one seemed perfect during an election campaign because no voters would be directly affected.

Now that the election is over, however, the plan is getting closerscrutiny, and some are beginning to suggest that only a fraction of Mr. Clinton's $45 billion could be raised, although the foreign companies involved remain tight-lipped.

"They don't want trouble. They are looking for some kind of solution, a quiet one," said Hidekado Miyaji, a Japanese diplomat in New York.

At the heart of the debate over how much taxes foreign companies should pay are some complicated formulas that can be boiled down to one question: Are foreign-owned companies juggling their books to minimize profits and lower the taxes they pay?

4 At first blush, the answer would seem to be yes.

The proof: Between 1983 and 1991, the U.S. Commerce Department reports, the annual rate of return of foreign-owned companies in the United States was 3.1 percent vs. 8.4 percent for U.S. companies and 13.5 percent for U.S. companies operating abroad. The argument goes that if U.S. companies can earn 8.4 percent doing business here, then foreign-owned companies' 3.1 percent profit is a trick to minimize their tax burden.

The method: the transfer of revenue made when a foreign-owned multinational buys a part, like a car door, from its overseas parent and pays an inflated price for it. The parent company gets to pocket the high price for the door, and the U.S. subsidiary can report high costs and consequently lower profits, which mean lower taxes.

The motive: high U.S. taxes. Although U.S. tax rates are competitive with other countries', the "effective tax rate" -- the real amount a company pays once tax credits and other factors (( are calculated -- is higher here. For companies from 10 of 11 countries studied by the Paris-based Organization of Economic Cooperation and Development (OECD), effective taxes were sometimes drastically lower at home than in the United States.

For example, German companies, which account for $28 billion in foreign investment in the United States, have an effective tax rate in the United States of 46 percent of income. In Germany, the effective tax rate is 23 percent. This could give a German company a real incentive to downplay its profits here, boost the profits of its parent company and pay taxes back home.

The same could be said for companies from Belgium, France, Japan, the Netherlands, Sweden and Switzerland, according to the OECD figures, which are considered the most objective. There is little difference between the tax rates here and back home for companies from Australia, Canada, Luxembourg or Great Britain.

"Based on the effective tax rates, a lot of companies have an incentive to shift profits overseas," said J. Steven Landefeld, who prepared a study on foreign investors' tax rates for the U.S. Department of Commerce.

For critics of foreign companies, proof that they are following this strategy is seen in a decision by Matsushita Electric Industrial Co. last month to reach agreement with the Internal Revenue Service on how it calculates the prices it pays for parts from its parent company. This "advance pricing agreement" will not allow Matsushita, which makes Panasonic, Quasar and Technics products, to pay inflated prices for parts that it imports from Japan.

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