I have suggested before, and I will suggest again, that transfer pricing is contributor to the tax gap.
Many are not convinced by such arguments. Take this testimony given by the IRS to Congress in July:
Testimony of Stephen E. Shay
Deputy Assistant Secretary (International Tax Affairs)
U.S. Department of the Treasury
Before the U.S. House Committee on Ways and Means July 22, 2010
Chairman Levin, Ranking Member Camp and members of the Committee, thank you for the opportunity to testify on the important topic of transfer pricing. I will focus my testimony today on Treasury’s analysis of the available data relating to the issue of whether profits are being shifted abroad out of the United States for tax purposes through the mechanism of related party transactions or, as the mechanism is more commonly known in the tax policy community, through transfer pricing.
We conclude, based on our analysis of available data, that there is evidence of substantial income shifting through transfer pricing.
My emphasis added.
And as they note – there’s a very odd correlation between tax rate and profits in MNCs. As the tax rate of a jurisdiction goes up reported profit in relation to sales goes down – and the IRS do not believe that is because of costs, very clearly.
The answer, of course, is clear – as the evidence on evidence also showed. Country-by-country reporting would help enormously in tackling this issue.