International Taxation: Updated Information on Transfer Pricing

GAO discussed transfer pricing issues facing the Internal Revenue Service (IRS), specifically tax payments of foreign-controlled corporations, exams, appeals, litigation, and new transfer pricing regulations. GAO noted that: (1) from 1987 through 1990, 72 percent of foreign-controlled corporations paid no U.S. income tax, compared to 59 percent of U.S.-controlled corporations; (2) although IRS has increased audits of foreign-controlled corporations, it has not yet succeeded in sustaining examination findings from previous years through the appeals process and the courts; (3) IRS has not adopted a staffing model to help allocate international staffing resources; (4) a new data system to capture all examination findings is not yet in place; (5) IRS use of different procedural tools has varied such as advance pricing agreements and arbitration, and their impact is uncertain; and (6) the increase in international trade and foreign investments will increase the potential for underpayment of U.S. taxes.