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United States: Jobs, Trade Deficit, and Transfer Pricing

You might want to watch a video that discusses U.S. manufacturing job losses over the past ten years, ostensibly in the context of the U.S. ongoing massive net trade deficits. What seems to be lost on (or at least not discussed by) most journalists and commentators who write on this topic, is that important seeds of the U.S. loss in manufacturing jobs and its net trade deficits can be found in multinational company transfer pricing policies that began in earnest in the mid-1980s.

Simply put, such 'transfer pricing' purports to put profits generated by multinational companies in the jurisdictions where they are earned pursuant to subjective 'comparable company' or other purported 'arm's length equivalency' analysis. That transfer pricing then is adjudicated by country-specific taxation authorities. Clearly it has been, and continues to be, advantageous for multinational companies to earn taxable profits in 'low-tax jurisdictions'. If those low-tax jurisdictions are also developing countries with low labour rates, so much the better. Hence the large resultant current cash balances of many multinational corporations held 'off-shore' in the countries where those profits were 'earned' pursuant to the transfer pricing regimes of those multinational companies.

Transfer pricing became, and continues:

  • to be a large source of fees for legal, accounting, and transfer pricing focued professional firms;

  • to be a mechanism that has seen, and unless changed will continue to see, off-shoring of significant numbers electronic and other manufacturing and service jobs; and,

  • to result in cash accumulations by multinationals that have moved manufacturing and support services to low-taxed jurisdictions.

Simplistically stated, jobs have been off-shored to the benefit of multinational corporations pursuant to agreement or tacit agreement with jurisdictional taxation regimes that those multinationals have been and are transacting business on an arm's length equivalent basis, resulting in:

  • a permanent loss of manufacturing jobs to off-shoring;

  • loss of corporate income tax revenue developed country governments would have received but for the income tax and transfer pricing policies they enabled; and,

  • loss of developed country income tax revenue from their population bases who have lost those manufacturing jobs, where those manufacturing jobs are slowly being replaced by lower paid service jobs that in their own way exacerbate developed country government spending deficits.

Importantly, these things materially have impacted, and continue to impact, the resultant developed country (read in particular the United States) net trade deficits, continuing budget deficits, and unsustainable national debt balances when measured against prospective developed country economic growth.

It will not surprise me if the developed countries do not re-think their transfer pricing regimes going forward. As a minimum I anticipate that going forward taxation authorities will increasingly review multinational transfer pricing policies and structures as one way to possibly generating incremental corporate income tax revenues.

Topical Reference: Trade Deficit with China Has Cost 2.8 Million U.S. Jobs Over Past Decade, from Economy in Crisis, March 30, 2013 - video, viewing time 5 minutes. Also read Topical Reference: U.S. Global Companies Make More, Pay Less in Taxes, from The Fiscal Times, Jia Lynn Yang, March 27, 2013 - reading time 4 minutes.


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