CAPITALISM'S ACHILLES HEEL Dirty Money and How to

Magnitudes and Misunderstandings 195
Ever since, Mansfield’s judicial opinion has been known as the “revenue
rule,” which means that it is not the duty of one nation to enforce the tax
regulations of another nation. With this as common law, incentives for tax
evasion via falsified pricing and revenue havens steadily grew. 46
In the United States, the 1928 Revenue Act gave the Secretary of the
Treasury the power to allocate income between related parties as necessary to
record accurately the tax that should accrue to each party. Section 482 of the
Internal Revenue Code reflects this as follows: “In any case of two or more
organizations, trades, or businesses . . . owned or controlled directly or indirectly
by the same interest, the Secretary may distribute, apportion, or allocate
gross income, deductions, credits or allowances between or among
[them] if he determines that such distribution, apportionment, or allocation
is necessary in order to prevent evasion of taxes . . .”
Regulations adopted in 1934 applied the arms-length rule to transfer
pricing decisions, requiring businesses to price transactions between related
entities as they would with an unrelated third party. Methods for testing
arms-length pricing were laid out in 1968 regulations, which also extended
application of transfer-pricing rules to services and intangibles.
For the next 20 years, the U.S. Congress watched as U.S. corporations
shifted revenues from imports and exports of both tangibles and intangibles
into low-tax jurisdictions. This led to the Tax Reform Act of 1986 and additional
temporary and final regulations in the 1990s, which together multiplied
the ways in which arms-length transfer pricing could be calculated.
These various methods are now referred to as cost plus, resale price, comparable
profit, profit split, comparable uncontrolled price, comparable adjustable
transaction, matching transaction, and more.
Not only was Congress concerned about U.S. businesses shifting
taxable profits out of the United States, it was also angered to find that
U.S. subsidiaries of foreign corporations were doing likewise. The GAO
completed a study in 1992 that found that, for the year 1986, foreigncontrolled
corporations in the United States reported sales of $543 billion
and losses of $1.5 billion, “possibly because of inappropriate transfer
pricing practices.” 47 Continuing this line of investigation, a 1999 GAO
report covering the period 1989–1995 found that, among some 60,000
foreign-controlled corporations, an average of 70 percent paid no taxes
during the period. 48 Yet another GAO report in 2004, covering the period
1996–2000, put the foreign nonpayers at 71 percent. 49