Friday, June 4, 2010

Is Getting it Right More Important than Getting it Back?

The other day I read about a recent Grant Thornton, LLC, survey of some 496 top U.S. financial executives. The survey asked what was the top priority of their tax departments. They concluded that the number one priority was not how much tax they can save the company, but rather providing timely and accurate tax return preparation and compliance. I agree that any self-respecting tax department is going to be focused on providing timely and accurate return preparation and compliance. However, it is hard to imagine that they are not just as interested in saving the company the most they legally can on their taxes. Now don’t get me wrong--I agree with the survey that accuracy and compliance is the number one priority of most tax departments; however, I would bet that tax avoidance is probably number 1A. Maybe they haven’t heard about “Transfer Pricing.”

It is estimated that U.S. companies legally avoid paying about $60 billion in federal income taxes each year through the use of transfer pricing. (Transfer pricing is the practice of pricing contributions transferred within an organization, which affects the amount of taxes owed.) The article mentioned a company that had sold $2 billion worth of a particular drug. All of these sales were made in the U.S. to U.S. customers, but by using transfer pricing to transfer the profits from the sales of this drug to its Bermuda subsidiary, the company paid no U.S. income taxes on the profits. (Bermuda does not have a corporate income tax.) So is getting the tax return and compliance right really the top priority of corporate tax departments or is it actually how much of a refund they can get back for their employers--or, better yet, avoid paying in the first place? I think that accuracy and compliance are probably the top priority but I would wager that tax avoidance is a very close second. What do you think?

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