If you read during the week an editorial written by a well-known name here in Romania, not only by economists but also by the general public, you already know that "transfer-pricing practices (of profit export through manipulated transfer prices) are more detrimental for the host country in time of crisis."

And if you heard the Minister of Finance’s statements you also know that upgrading IRS’s department of transfer pricing is a priority. "I’m not saying that such operations are illegal, but we must be careful that profits of multinationals are being distributed in a fair way for the Romanian state too." 

With two or three more such public declarations I think the Romanians will be enlightened and even if they won’t exactly know what "this transfer pricing" means they will certainly know "it's not good. It's some sort of conspiracy, there’s a hidden agenda "... What more can we say, it is the perfect public enemy.

If I tell you that transfer prices are nothing more than the prices at which a subsidiary carries out transactions with the parent company/majority shareholder ... that these prices are correct and no one is to say they are high, low, good or bad prices as long as they are at market value ... that for years, also in Romania, each company member of a group (national, multinational) has a duty to prove that it used the correct prices otherwise is fined... That being the case, you would probably think that I want to distract you from…what do they call it ... transfer pricing? 

Actually, I would really like you to see the real issue here and no, I am not going to give a technical speech. Instead, I would like you to relax for a few minutes, and soak up the atmosphere of an American baseball game.

Imagine a huge baseball stadium with excited people in the stands and tense teams swinging their bats. The megaphone announces that a powerful team is about to enter on the field but they seem to have a problem with the “fair balls”.

Specifically: around spring, the permanent investigations subcommittee of the US Senate releases a report - "The Caterpillar off-shore tax strategy". I will not go into details but I guess you figured it out…it’s about transfer pricing. It looks like Caterpillar has established a subsidiary in Switzerland which sells spare parts on foreign markets and it records all profits even thoughthe job of buying parts from suppliers, storage etc. it’s for those from back home in the States where they do not receive the applicable tax. That’s around $ 2.4 billion in 13 years, as calculated by the “Swiss Scheme” regarding the loss for the IRS.

Did you get the picture? In Bucharest, if you come across a construction site you will immediately understand what a CAT bulldozer is and what the business with spare parts for such a machinery entails. Go to the States and ask how many employers from the heavy industry provide 52,000 jobs and you will understand why CAT is a symbol-company loved by Americans ... But this company does not bring the profits backhome (as we would say, it exports it) ... and acts just like the stubborn “Irish” from  the IT business (i.e. American multinationals that establish their subsidiaries in Ireland. For example Apple who obviously has a report from the US Senate).

The political megaphone can see that it upset the crowd and wants to cool off the small taxpayers / SMEs blasting "Look who's to blame! That's why we have large deficits, because multinationals, with their transfer prices are exporting profits! And now, with a bulldozer!”.

But even if it’s not a thin report (it has 90 pages) and gentle at all, a political report can’t give a verdict. After making some noise the IRS enters the field! Feared by all, the IRS bulldozer who caught even Al Capone enters the scene and puts everything in order.

The game has started. Immediately after the report, CAT throws the ball really hard with a tough statement - “We disagree with these proposed adjustments, which the IRS did not propose in previous audits of U.S. tax returns in which the same tax positions were taken,” IRS does not retaliate (officially it doesn’t give details about the control checks) but I don’t believe it was pleased about it. So the IRS was conducting audits and found nothing suspicious...this is not at all a gracious statement; it looks like CAT wants to play hard. 

Once again, the megaphone announces the mighty "policeman" for the American capital market, also known as SEC, who is submitting a question: let CAT tell us (because it's listed) what is their opinion about the IRS inspection and what will they do if...? "More likely than not” to win, CAT insists. They also make it clear that the The IRS is likely to make its determination within 12 months, Caterpillar, and if the IRS disallows Caterpillar's Swiss tax strategy, the company said, it would appeal that decision, a process that could take years.

Speaking the language from the baseball field do you have any idea how such an answer could be interpreted? 

However, where did this unusual bravery of CAT came from? With the IRS? No room for negotiation?

CAT's defense is simple:

1. We have a plan of tax restructuring which was meant to improve the business by eliminating the redundant middleman between supplier and client, given that two-thirds of sales are from outside US. 

2. The Swiss maneuver played out within the legal framework, exploiting the offered opportunities.

In a few words "Americans pay the taxes they owe, but not more. As an American company we pay the taxes we owe, not more"- as one of CAT’s tax manager said in the Senate hearings. Remember we are talking about a iconic-company, so he knows the language of the spectators.

Any ordinary man can now understand what happens on the field- it is natural (neither good nor bad) for a company to pursue their interest / profit within the legal framework ahead of them. If the government doesn’t agree with the results then there’s nothing else to do but change the law. It has the right, but it also has to face the consequences of their action. 

You, American government, ask yourself: would CAT still be able to offer employment to hundreds of thousands of Americans (directly and indirectly through suppliers) if the provided framework is uncompetitive, and lose to Japanese or Chinese competitors? You should ask yourself, why did you come to have the highest effective tax rate among industrialized countries and the third highest in a ranking of 163 countries? 

This also applies for us now that the Tax Code is in discussion, including transfer pricing. I really welcome the fact that there are taken into consideration the points of view from the business community. This is the kind of atmosphere that should always be on the field, because we are not in a game with the good and bad, on one side the government and on the other side the multinationals. We are actually playing a game where there should not be opponents or an enemy handed for the crowd to bite from.

Article published on contributors.ro in August 27. Author: Adrian Luca, TPS.