Taxes—The Last Hurdle to aFree Global Economy

Mohamed E. Hussein

BOOKS REVIEWED:

Moore, M. L., and E. Outslay.2000.U.S. Tax Aspects of Doing Busi-ness Abroad, 5th ed. (NewYork: AICPA).

Feinschreiber, R., Editor.2000.Transfer Pricing International:A Country-by-Country Guide(New York: John Wiley &Sons).

Countries have liberalizedtheir investment laws,lowered tariffs, and float-

ed currencies to increase thefree movement of capital andgoods in the global economy.One area in which change hasbeen slow is tax policy. Evenwithin economic blocks such asthe European Community theharmonization of tax systemshas been difficult. This can beattributed to the fact that taxsystems evolve over timereflecting social and politicalfactors as much as economicconsiderations. Taxes have thetwin roles of being instrumentsof economic and social policiesas well as the source of rev-enues for government. As a

result, each tax system is ajumbled collection of directtaxes such as income tax andindirect taxes such as value-added and sales taxes. Whichtax or combination of taxes areused as the main source varybetween countries. Moore andOutslay (2000, Table 4.1)report statistics showing thatJapan draws 16.4 percent of itstotal tax revenues from corpo-rate income tax while Franceand Germany draw only 3.8percent. On the other hand,Mexico draws 57.4 percent ofits tax revenues from indirecttaxes on goods and services.

Another factor that makestax an important considerationin global business is the factthat some countries tax theworldwide income of their citi-zens and corporations (world-wide tax system), while otherstax only income generatedwithin their borders (territorialtax systems). Another compli-cation is caused by the fact thatmany countries enter intotreaties with other countriesthat provide exemptions or con-cessions on income earned intheir treaty partners’ borders.

Tax planning has becomean important component of

global business strategies. Thechoice of organizational formand location of operations is asmuch influenced by tax as byother business considerations.The Moore and Outslay book,published by the AICPA,addresses these issues.

One strategy used by com-panies is to shift income fromhigh-tax jurisdictions to lower-tax jurisdictions. This is doneby where operations are locatedand how much subsidiariescharge each other for goodsand services. Tax authoritieslook closely at such intracom-pany transactions to ensure thatthe transfer prices used reflectvalue rather than means to shiftincome. A significant portionof tax cases in the UnitedStates deal with cross-countrytransfer prices.

U.S. TAX ASPECTS OF DOINGBUSINESS ABROAD

The authors are CPAs aswell as Ph.D. holders. Dr.Moore is a practitioner whileDr. Outslay is an academic. Thebook is published by theAICPA and is supported by theAICPA International Tax Tech-

bo

ok review

63© 2001 John Wiley & Sons, Inc.

nical Resource Panel. Theauthors state (page 1): “Thepurpose of this publication is toprovide an introduction andpractical guide to the intrica-cies of the federal income taxlaws that apply to U.S. personsinvesting or doing business out-side the United States and non-U.S. persons investing or doingbusiness within the UnitedStates.” Their intention is toprovide tax planning sugges-tions and caveats.

The book has 22 chaptersdivided into five parts. PartOne (Chapters 1–4) is anoverview of the U.S. taxation ofoverseas operations. An impor-tant chapter in Part One isChapter Four, which comparesthe tax systems of the UnitedStates with those of nine of itstrading partners. Part Two(Chapters 5–7) covers sourcerules for income and deduc-tions, income tax treaties, andforeign tax credit. Part Twoincludes the two largest andmost important chapters in thebook: Chapter 5, on source-of-income rules, and Chapter 7,on foreign tax credit. The twochapters are important becausethey determine how much taxcredit a company can deductagainst its U.S. tax liability.The process of calculating theforeign tax credit is complicat-ed by the requirement that for-eign earned income be classi-fied into different basketsbased on the country where itis earned. This can result in notbeing able to claim some for-eign tax against U.S. paid taxes.

The third part (Chapters8–14) covers taxable entitiesunique to foreign operations.The chapters cover the taxrules for controlled foreigncorporations (CFCs), foreignsales corporations (FSCs), anddomestic international corpora-

tions (DISCs). Part Four(Chapters 15–18) covers for-mations, liquidations, and reor-ganizations involving foreigncorporations (Chapter 15);Chapter 16 discusses taxationof citizens or resident aliensworking abroad. Chapter 17 isabout transfer pricing underSection 482 of the InternalRevenue Code. Chapter 18 dis-cusses the tax aspects of cur-rency fluctuations. Part Five(Chapters 19–21) covers thetax aspects of U.S. transactionsby non-resident aliens and for-eign entities.

The book is well writtenand reflects the background ofits two authors and the supportof the AICPA. It is a technicalbook that covers tax regula-tions as well as planning andstrategy issues. It can be usedin a graduate tax course, atraining course for tax profes-sionals, or as a desk referencefor a tax practitioner.

TRANSFER PRICING INTER-NATIONAL: A COUNTRY-BY-COUNTRY GUIDE

The editor of the book is anattorney who is a partner in afirm that specializes in interna-tional transfer pricing. He isalso an author of a two-volumehandbook on transfer pricingwith a special focus on theUnited States, published byJohn Wiley and Sons. The edi-tor plans to supplement thebook with annual updates. Helists his address, fax numbers,and e-mail address for readersto suggest additional topics orinform him about transfer pric-ing legislation, implementation,audit techniques, or transferpricing litigation.

There are 57 contributorsfrom across the world; many ofthem are partners in Big Five

firms. The book has 36 chap-ters covering transfer pricing inscores of countries from allcontinents. It is divided intofive parts. Part One (Chapters1–2) covers the methods pro-posed by the Organization forEconomic Cooperation andDevelopment (OECD). ChapterOne describes the transactionalnet margin method (TNMM)proposed by OECD and com-pares it to the IRS comparableprofits method (CPM) andevaluates whether the differ-ences between the two methodscan lead to double taxation.Chapter Two describes rulesfor transfer pricing of intangi-ble properties and comparesthe OECD method to IRS Sec-tion 482.

Part Two (Chapters 3–12)discusses transfer pricing in theAmericas. Part Three (Chapters13–18) discusses transfer pric-ing in Asia and Australia. PartFour (Chapters (19–34) isabout Europe and Africa. PartFive (Chapters 35–36) reportsthe results of comprehensiveglobal surveys conducted bytwo of the Big Five firms.Chapter 35 reports a surveyconducted by Ernst and Youngin 1999 to examine practices,perceptions, and trends oftransfer pricing in 19 countries.The results of the surveyreported include issues such asinvestigation experience, needfor documentation, double tax-ation, and future likelihood ofexamination. Forty-two percentof the examination cases result-ed in double taxation. The tworeasons given for not pursuingrelief are “it takes too muchtime” or “exposure is toominor.” Chapter 36 is titled“Strategy Matrix for GlobalTransfer Pricing: Comparisonof Methods, Documentation,Penalties, and Other Issues.”

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© 2001 John Wiley & Sons, Inc.

The book has a wealth ofinformation about practices,regulations, and strategies thatdeal with transfer pricing

across the world. It is a valu-able reference for a taxdepartment of a multinationalcorporation or a law or

accounting firm that special-izes in international taxation.It can be used in professionalseminars.

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© 2001 John Wiley & Sons, Inc.

Mohamed E. Hussein, Ph.D., is professor of accounting at the University of Connecticut at Storrs,Connecticut. Dr. Hussein has taught in the university’s undergraduate, MBA, EMBA, and doctoral pro-grams. He was the Andersen Consulting Faculty Fellow at the university, and he has served as resi-dent director of the university’s Program in European Studies, at the University of Maastricht, in TheNetherlands. His research has been published in a variety of professional and business journals.