Obama Tax Reform Collides with U.S. Transfer Pricing Competitiveness

NEW YORK, Jan. 18, 2012 /PRNewswire/ -- In recent weeks President Obama and the House Ways and Means Committee chairman, David Camp (R-MI), have offered competing ideas for international tax system reforms.  Michael Flaherty, a partner with the global tax and business advisory firm WTP Advisors, has compared and contrasted the two sets of proposals in terms of their potential impact on transfer pricing planning and administration in an article appearing in the current issue of Transfer Pricing Week.  

Transfer pricing refers to the way in which a multinational company prices goods, services, intangibles and capital to and among its foreign affiliates. It is one of the most important business and tax considerations facing any multinational business – the numbers of which are growing because even small to mid-size organizations are doing business in more than one country. 

"If the U.S. is to remain an attractive place for multinationals to do business, our tax system and tax rates must compare favorably to those of other jurisdictions," says Flaherty.

Flaherty believes the Camp proposals offer real hope for fundamental tax system reform and simplification, as they would advance the cause of U.S. tax system competitiveness. By contrast, his analysis shows the Obama proposals mostly continue efforts to protect tax revenues and maintain the current tax system's complexities and high rates. 

"The Obama proposal would maintain the gap between the U.S. tax system and its international counterparts, while the Camp proposal would inaugurate fundamental changes, introducing a territorial system similar to those utilized by many other countries, and lower the corporate rate to a level that is in the middle of the range applied by other OECD member states," says Michael Flaherty, transfer pricing partner at WTP Advisors.

Flaherty believes that Camp's proposal, which was introduced as a discussion draft, is intended to encourage discussion and dialogue.  Camp's discussion draft underscores this point by placing all tax rates and other required mathematical calculations within brackets, clearly reflecting his intention that the draft is intended as a flexible starting point for further legislative discussions.  He reinforces his "open-dialogue" process by including a key element from Obama's proposal – taxing excess returns from intangibles - as one of the three possible options in his own proposals for dealing with the concern that U.S. multinationals are finding it necessary to move valuable intangible assets offshore to low-tax locations. In framing his legislative proposal as an unfinished discussion draft, Camp makes clear his belief that fundamental tax change will require bi-partisan effort.

In contrast to the Camp proposal, which is focused on trying to find ways to bring the U.S. tax system to a more competitive stance, the principal message in the Obama Administration proposal is that "there is evidence of income-shifting offshore" and Congress should impose a blockade to prevent tax planning rather than addressing the underlying problem – a complex and uncompetitive tax system.

Ultimately, Flaherty believes that for the U.S. to remain competitive, tax reform must include fundamental tax system reform and significantly lower corporate rates.  He also has gone on record saying that the U.S. may ultimately need to adopt a value added tax or other consumption tax in order to meet future revenue needs and to achieve a balanced budget.

WTP Advisors is a leader in tax and business advisory services for a global marketplace. Our highly skilled professionals equipped with years of industry experience, coupled with our cutting-edge technologies, make substantive and long-term differences to an organization's profitability. WTP Advisors is headquartered in White Plains, N.Y., with offices across the Americas, Asia and Europe.

SOURCE WTP Advisors

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