Transfer pricing — such as with technology fees — conforms to the same pattern of universal use and recommended advice within the high-‐end business sector. Transfer pricing technology fees allows “hundreds of other corporations” in addition to Apple to use transfer pricing means “which reduces taxes by routing profits through Irish subsidiaries and the Netherlands then to the Carribean.” How Apple Sidesteps Billions in Taxes, New York Times, Business Day, April 28, 2012.
Apple makes its products here; Apple sells its products here; Apple markets its products here; but Apple, “like hundreds of other corporations” use transfer pricing to pay little taxes here in a purely lawful and legal manner. How Apple Sidesteps Billions in Taxes, New York Times, Business Day, April 28, 2012. Indeed, Apple saved $2.4 billion in tax payments through this method. How Apple Sidesteps Billions in Taxes, New York Times, Business Day, April 28, 2012.
As the research concluded, “Apple’s accountants have found legal ways to allocate about 70 percent of its profits overseas.” How Apple Sidesteps Billions in Taxes, New York Times, Business Day, April 28, 2012. Even though the “transfer was internal and simply moved funds from one part of the company to a subsidiary overseas” the “result” was to allow “profits could travel virtually tax-‐free” with cash transfers from United States sales to bank accounts in the Carribean. How Apple Sidesteps Billions in Taxes, New York Times, Business Day, April 28, 2012.
Leading authorities noted these methods were common to companies with an international presence is “using perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S.” How Apple Sidesteps Billions in Taxes, New York Times, Business Day, April 28, 2012.
Google mirrored the same techniques, with full IRS sanction and approval. See Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes, Bloomberg, October 21, 2010. The “technique” Google used reflected a common technique of companies with technology assets to transfer pricing and profits to offshore jurisdictions, an “income shifting” stratagem approved by the IRS. See Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes, Bloomberg, October 21, 2010.
The same structure “gained favor” throughout the technology industry in the Bay area, including such prominent companies as Facebook and Microsoft. See Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes, Bloomberg, October 21, 2010. As the reports document, “the earning wind up in island havens that levy no corporate income taxes at all.” See Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes, Bloomberg, October 21, 2010. The report cited leading experts noting the method was “very common” “particularly with companies with intellectual property.” See Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes, Bloomberg, October 21, 2010. Microsoft used similar means in “legally avoiding paying billions in taxes” as even a Senate subcommittee led by an IRS advocate admitted. See Microsoft Is Accused Of Legally Avoiding Paying Billions In Taxes By The Senate, Business Insider, September 20, 2012; see also Offshore Havens Saved Microsoft $7B In Taxes, CNN Money, September 20, 2012. The main means identified involved shifting technology with royalty payments overseas from intellectual property transferred overseas, without the activities of the technology shifting overseas, through Congressionally incentivized, Constitutionally conforming laws of international taxation. See Offshore Havens Saved Microsoft $7B In Taxes, CNN Money, September 20, 2012.
Facebook furthered a similar approach. See No Taxes For Facebook, CNBC, U.S. Business News, March 1, 2012. Facebook’s profit enriching public offering actually created a special tax break of $3 billion under the complexity of the tax laws, with its idiosyncratic Congressional incentives. See No Taxes For Facebook, CNBC, U.S. Business News, March 1, 2012. Indeed, estimates were Facebook “could end up paying no taxes for years, even decades.” See No Taxes For Facebook, CNBC, U.S. Business News, March 1, 2012.
Nor is this an unusual outcome for most corporations. As the Government Accountability Office independent audit found, the availability of such tax exceptions within the Code showed that 1.3 million U.S. companies doing business in the United States with a combined $2.5 trillion in revenue “paid no income taxes.” Most Firms Pay No Income Taxes: Study Finds That The Majority Of Domestic and Foreign Corporations In The United States Avoid Paying Federal Income Taxes, CNN Money, August 12, 2008.
Individuals mirror these institutional policies, as evidenced by the careful multi-‐generational tax planning of both the Heinz family and the Romney family. See Offshore Tactics Helped Increase Romneys’ Wealth, The New York Times, Politics, October 1, 2012; see also Kerry’s Wife Releases Part of Her 2003 Income Tax Return, David Cay Johnston, New York Times, October 16, 2004. The use of “offshore arrangements” allows Romney’s entities to “avoid taxes on investments” and his “tax-‐ avoidance strategies have enhanced his income.” Offshore Tactics Helped Increase Romneys’ Wealth, The New York Times, Politics, October 1, 2012. Just one set of transactions analyzed by the New York times evidenced “tax benefits worth more than $50 million” to the bottom line of Romney connected investments, entities and businesses by simply “routing” transactions through various jurisdictions in a variety of
transfer pricing. Offshore Tactics Helped Increase Romneys’ Wealth, The New York Times, Politics, October 1, 2012. Collectively, potential First Lady Teresa Heinz Kerry reported taxes paid of $628,401 on reported wealth of a $1 billion, or less than 1% of her likely income; equally, Mitt Romney reported $1,940,000 in reported taxes paid in an election year on estimated wealth of $250,000,000, or a tax rate of approximately 7%. See Offshore Tactics Helped Increase Romneys’ Wealth, The New York Times, Politics, October 1, 2012; see also Kerry’s Wife Releases Part of Her 2003 Income Tax Return, David Cay Johnston, New York Times, October 16, 2004.
The IRS has no greater losing streak in any matter of civil tax dispute than in the areas of captive insurance and transfer pricing. See Amerco, Inc. v. Commissioner, 979 F.2d 162 (9th Cir 1992) (both tax court and the Ninth Circuit Court of Appeals held IRS was wrong about captive insurance as a tax deduction). This follows Supreme Court precedent of more than six decades. See Moline Properties v. Commissioner, 319 U.S. 436 (1943). The same applies to decades of transfer pricing cases – the IRS loses again and again and again. See Sundstrand Corporation v. Commissioner, 96 T.C. 266 (1991); see also Sundstrand Corporation v. Commissioner, T.C.M. 1992-‐86 (1992). Not surprisingly, the Ninth Circuit led the way in striking down these IRS refusals to recognize the tax deductibility of transfer pricing through foreign organizations. See Xilinx, Inc., v. Commissioner of Internal Revenue, 598 F.3d 1191 (9th Cir. 2010). This parallels substantial defeats by the IRS in their “economic family” theory of trying to deny captive insurance deductions. See Clougherty Packing Co. v. Commissioner, 811 F.2d 1297 (9th Cir. 1987). This led to a sequence of high profile IRS losses. See Hospital Corporation of America v. Commissioner of Internal Revenue, 109 T.C. 21 (1997); see also Kidde Industries v. United States, 40 Fed. Cl. 42 (1997). Criticism of the IRS rebounds throughout the industry for its failure to recognize the court precedence in this area. See “Has The IRS Lost Its Mind?”, ICS Alternative Risk Financing, January 2008. IRS attempts to contest this legally empowered method meet with continued court resistance. See PepsiCo Wins Debt-Vs-Equity Dispute in U.S. Tax Court, Chicago Tribune, Business, September 25, 2012 (noting “PepsiCo has won a $363 million dispute with the Internal Revenue Service in U.S. Tax court in a ruling of interest to companies seeking to avoid taxes when brining cash from abroad into the United States.”)
One of the most recent IRS losses in a decade of such losses involved a billion dollar loss by the IRS. See Veritas Software Corp. v. Commissioner, 133 T.C. No. 14 (Dec 10, 2009). Notably, in Veritas, a California company known for its use of captive insurance, and incorporation of technology transfer and pricing related thereto to create deductions, the court recognized each and both as a legitimate tax-‐deductible activity over the IRS’ myriad failed objections. See Veritas Software Corp. v. Commissioner, 133 T.C. No. 14 (Dec 10, 2009). This bookmarked a decade of IRS failure, from their prior high profile $600 million loss to UPS to their billion dollar loss to Veritas. See United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254 F.3d 1014 (11th Cir. 2001).
The UPS case equally warrants repetition. As the facts therein established, UPS was far more aggressive and much more tax-‐concerned than Three Rivers. As the court noted: “UPS’s insurance broker suggested that UPS could avoid paying taxes on the lucrative excess-‐ value business if it restructured the program as insurance provided by an overseas affiliate.” See United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254 F.3d 1014, 1016 (11th Cir. 2001).
Notably, and as the notoriously pro-‐government Eleventh Circuit declared: a “business purpose does not mean a reason for a transaction that is free of tax considerations.” See United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254 F.3d 1014, 1019 (11th Cir. 2001). After all, “to conclude otherwise would prohibit tax-‐planning.” See United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254 F.3d 1014, 1020 (11th Cir. 2001). Any “genuine need” for the expense justifies its business purpose. See United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254 F.3d 1014, 1020 (11th Cir. 2001). This conforms to decades of undisturbed case law and precedents across the jurisdictions.
A knowledgeable IRS defense lawyer can assert, help enforce, and guard your rights in the IRS criminal investigation process at many stages of the case before it gets too far. While the past cannot guarantee the future, it is a resume worth knowing when choosing your tax defense lawyer. Barnes Law enjoys a 90% success in preventing the government from imprisoning its clients even when only hired after a fraud audit or IRS criminal investigation has commenced, while protecting your privacy in the process and limiting the amount of fines, fraud penalties, tax and interest the IRS can charge. Barnes Law is often the best investment you will ever make. Choose wisely: your freedom, your future, and your finances often depend upon it.
