CAPITALISM'S ACHILLES HEEL Dirty Money and How to

196 CAPITALISM’S ACHILLES HEEL
Of course, U.S. corporations cannot afford to be outdone by their foreign
competition. So they, too, curtailed paying taxes. In the 1989–1995 period,
60 percent of U.S. corporations were nonpayers, rising by 2000 to 63
percent, including some of the country’s largest multinationals. 50
Quite simply, using abusive transfer pricing techniques, often combined
with tax havens and secrecy jurisdictions, many U.S. and foreign corporations
operating in the United States ceased paying taxes. Profits were at alltime
highs, but never mind. For some European countries, corporate tax
bases have been similarly eroded. In other words, the methods developed in
the West, intended at first to pull money out of developing and transitional
economies into western coffers, have now come back to bite us—taking
money out of western economies into the global netherland and slashing tax
revenues in the process.
Now, consider abusive transfer pricing from a different angle: whether
it’s criminal. This should be a key question for thousands of officers and
managers in multinational corporations. I set up a typical situation in the
United States. Laws of many other countries are similar.
Suppose your company has an established manufacturing subsidiary in,
for example, Malaysia. In connection with new products to be produced
there, new materials are to be shipped from the United States. Operating
profits are high in the United States, and taxes are low in Malaysia, because
you still have a couple of years to run on the tax incentives given to establish
your business in Kuala Lumpur. Malaysian customs duties on the imports
will be 15 percent. Given these factors, a decision is made to shave profits in
the United States by selling the new supplies at a low price to the subsidiary.
You and several colleagues meet to discuss the matter and decide on charging
60 percent of the price at which the same items are sold to several other
subsidiaries around the world. This price may not even cover all production
costs in your U.S. plant. Commercial invoices are prepared, shipping documents
drawn, the subsidiary is advised by telephone what the price will be,
papers are mailed to Kuala Lumpur, the items arrive, and payment is wire
transferred to the parent company. These kinds of conversations, decisions,
communications, and financial arrangements are common in thousands of
companies every day.
Key elements of this scenario include: agreement to lower U.S. taxes,
substantially variant transfer pricing, use of mails and wires, and depriving
Malaysia of customs duties.