Some foreign-owned firms "strip" US profits to avoid taxes
November 28, 2007

WASHINGTON, Nov 28 (Reuters) - Foreign-controlled U.S. companies that move their headquarters overseas are rampantly "stripping" earnings to avoid paying U.S. corporate income taxes, according to a new U.S. Treasury Department study released on Wednesday.

The practice of earnings stripping by foreign-controlled firms involves adding excessive debt or other costs to a U.S. subsidiary to reduce local profits and avoid tax liabilities.

The Treasury study noted the existence of "strong evidence" of earnings stripping by foreign-controlled corporations that have undergone so-called "inversion" transactions -- those in which a U.S.-based parent company is replaced with a foreign parent in a low-tax or no-tax country.

The study did not find conclusive evidence of earnings stripping by foreign controlled domestic firms that have not undergone such inversions, but the Treasury said more information was needed to reach a definitive conclusion on the issue.

To achieve this, the Treasury is proposing a new corporate income tax form that would capture more information about the company's debt-to-equity ratio, net interest expenses, interest deductions and other key data.

The study, mandated by Congress in the American Jobs Creation Act of 2004, also looked at transfer pricing between subsidiaries of foreign controlled companies to determine whether related-party transactions were being used to improperly shift income out of the United States.

The study indicates that transfer pricing rule smust be continually be monitored to ensure their relvance ot changing business conditions and "to prevent income shifting from non-arms length transfer pricing."

It recommended new guidance on transfer pricing, including on the contributions for which arm's length consideration must be provided when entering a cost sharing agreement. It also recomended an update on related-party services regulations issued in 1968 and new rules to determine the amount of income from a global dealing operation that is subject to tax in the United States. (Reporting by David Lawder, Editing by Chizu Nomiyama,)

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