[Congressional Record Volume 144, Number 53 (Monday, May 4, 1998)]
[Senate]
[Pages S4203-S4204]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




     INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998

  The Senate continued with the consideration of the bill.
  Mr. DORGAN. Mr. President, the agenda for the Senate this week will 
be to discuss the bill that deals with the Internal Revenue Service. 
Among other things, this piece of legislation creates an Internal 
Revenue Service oversight board to help take a look at the management 
of various things with respect to the running of the IRS.
  I spoke last week about hearings on IRS misconduct and abuse. I 
indicated that, while I think the IRS has many good people who work 
very hard to collect the taxes that our laws require to be collected in 
this country, it is clear from the hearings that there have also been 
abuses that ought never be tolerated. I commend the Chairman for 
holding last week's hearings. We must use these hearings as the 
occasion to understand what went wrong and make sure it never goes 
wrong again. The American people don't ever deserve an IRS that is not 
fully accountable and an IRS that in some cases will harass and badger 
taxpayers in ways disclosed during the hearings last week.
  Let me just tackle one other aspect of the Internal Revenue Code and 
the behavior of the IRS. The IRS is required to collect the taxes 
needed to run the Government. Now the question is from whom does the 
IRS collect the amounts that are due? The people who go to work every 
day? The families that make a salary at work, and when they earn that 
salary, they have withholding taken out of their paychecks. Their taxes 
are sent to the U.S. Government. They don't have a choice. There is no 
flexibility. They work, they receive a paycheck, and they have 
withholding.
  But there are others doing business in America that are not quite so 
compliant. We need an IRS that cares about what they are doing as well 
and makes sure they pay their fair share of the tax load in this 
country. Let me give you an example. In a recent year, we had a study 
completed by the General Accounting Office (GAO), the investigative 
watchdog of Congress. One of the GAO's main findings was that 46 
percent of the largest foreign-based multinational firms--that is, 
firms with over $100 million in assets--are transacting hundreds of 
billions of dollars of business in this country and paying zero in 
income taxes to our country. That is right--not 10 percent or 5 percent 
or 1 percent, they paid zero in income taxes to this country.
  Now how, you ask, would a company based overseas do business in 
America, do tens of billions of dollars' worth of business, earn 
billions of dollars' worth of profit and pay zero in taxes? I mentioned 
46 percent of the largest companies with over $100 million in assets 
paid no taxes; 74 percent of all foreign-based corporations in the U.S. 
paid nothing, zero, in Federal income taxes. Let me say that again: 74 
percent of all foreign-based corporations doing business in the United 
States paid zero in Federal income taxes to this country. How do they 
do it? Something called transfer pricing.
  It is not only the foreign-based corporations, incidentally, that 
have a problem here. Most corporations that are doing business all 
around the globe are finding ways to minimize their tax burden through 
transfer pricing. Of course, not all of them do that. Many corporations 
pay exactly what they owe and do the best job they can of accounting 
for it.
  But transfer pricing means that you overprice an import into the 
United States in order to inflate the cost of goods sold, and therefore 
reduce, if not wipe out, their profit here. Or the alternative would be 
to underprice something you are exporting to another country in order 
that your subsidiary in the other country earns a very large income 
which would be subject low or no taxes in the other country. Because 
you priced it so low as you exported it here in this country, you end 
up making no money.
  Let me give you an example of how this works. There are a couple of 
professors employed at Florida International University. Their names 
are Simon Pak and John Zdanowicz. I have met them. They have done a lot 
of interesting work on the issue of transfer pricing. It is a 
Byzantine, complicated area of tax law, so complicated that very few 
people pay any attention to it. Yet billions and billions of dollars of 
tax avoidance occur every single year. ``U.S. Government is Cheated out 
of $42.6 Billion in Tax Revenues in 1997, Study Reveals.'' Pak and 
Zdanowicz recently released a study showing a conservative estimate of 
tax loss during 1997 due to abnormal pricing in international trade was 
$42.6 billion.

  Let me give some examples. Tweezers--everybody knows what tweezers 
are. Tweezers are tiny little things you buy at the drugstore for $1, 
$2, or $3. Tweezers were imported from Switzerland at $218 each. Now, 
did somebody really pay $218 for a pair of tweezers? Sure--a U.S. 
subsidiary of a foreign-based corporation. The foreign-based 
corporation sells the tweezers at $218 apiece, and they are a 
controlled U.S. subsidiary. They can never, ever make a profit, if they 
so desire. So whatever that corporation decides to do in the United 
States, they control their pricing back and forth. They will do a lot 
of business, make a lot of profit, but by overpricing tweezers to the 
tune of $218 apiece, they will never pay an income tax to the U.S. 
Government.
  So they can come here and they can compete against a U.S. business 
that doesn't do business in 10 countries, just does business here, and 
when they make a profit, they must pay a tax.
  How about bulldozers? Everybody knows what a bulldozer is. You drive 
down the road and see a construction project, you can identify a 
bulldozer at first glance. It is one of the biggest things you will 
see. Bulldozers exported to Belize for $551. Does anybody know where 
you can buy a $551 bulldozer?
  Let me go through some of the rest of the examples. Safety razor 
blades, $13 a piece. Television antennas--everybody knows what a 
television antenna is--$1,738 from the United Kingdom. Venetian 
blinds--most everybody has priced venetian blinds at some point. This 
would be a company that sold venetian blinds abroad and sold

[[Page S4204]]

them at a price that guarantees they can't make a profit here. They do 
it through controlled companies, so it is not real, just the way they 
price their transactions. Venetian blinds, 3 cents. How about a 
toothbrush for $18? Or better yet, a tractor tire shipped to France for 
$7.65?
  All of this represents tax avoidance in sophisticated swindles 
designed to prevent the U.S. Government from taxing a profit as they 
would do with a domestic corporation.
  The reason I mention all of this sophisticated tax avoidance that is 
that it is almost impossible to detect. When you have companies--a 
company wanting to do business in this country, in most cases it will 
be a large foreign-based corporation that creates a U.S. subsidiary.
  They will do business with their own subsidiary. And to try to 
construct their transactions back to some reasonable market prices is 
like trying to connect two plates of spaghetti together. It is 
impossible. Yet, that is what the IRS is attempting to do. It doesn't 
do very well; can't do very well. Enforcement here is abysmal. In fact, 
depending on who you ask, the tax avoidance per year is $40 billion, 
some say $25 billion, and some say $15 billion. There has been a study 
that says $4 billion and the IRS says only $1 billion. What is the 
truth? The truth is that it is far more than $1 billion or $4 billion 
that the IRS and Treasury are talking about. It is far closer to the 
numbers put together by Professors Pak and Zdanowicz.
  Well, I will speak more about the amendment at some point during this 
week when I offer it. The amendment I will offer is very simple.
  The amendment I will offer is to say the newly established IRS 
Oversight Board will review whether the IRS has the resources needed to 
prevent tax avoidance by companies using unlawful transfer pricing 
methods. In order to enable the board to carry out this duty, IRS shall 
conduct a study relating to its enforcement of transfer pricing abuses 
by multinational companies. Specifically, the IRS will review the 
effectiveness of current enforcement tools used by the IRS to ensure 
compliance under Section 482 of the Internal Revenue Code and determine 
the scope of nonpayment of U.S. taxes caused by both foreign and U.S.-
based multinational firms operating in the United States.
  Then the Board will report back to Congress its findings on the IRS 
enforcement of transfer pricing abuses and make recommendations for 
improving IRS enforcement tools.
  I understand what the response to this is by corporations who are 
engaged in tax avoidance by transfer pricing. I understand what the 
response is by the Treasury Department and the Internal Revenue 
Service. Corporations will say: Well, none of this goes on, this 
doesn't happen. The Internal Revenue Service and the Treasury 
Department will say: It happens, but we have done such a great job 
there is very little tax avoidance.
  But, of course, neither is true. The fact is that we have a very 
serious problem in this area, one that needs to be corrected, and it 
will not be corrected with the current enforcement method used by the 
Internal Revenue Service and the Treasury Department. As we talk now 
about how to recast the Internal Revenue Service, develop new 
procedures, develop new protections for taxpayers, develop an IRS 
oversight board, I am asking that the Internal Revenue Service and the 
Treasury Department--especially at the direction of this new oversight 
board--take a fresh, new look at this issue and try to determine how we 
can do better.
  In America, when someone decides to begin to do business and risk 
their capital in order to hold themselves out to do business and earn a 
profit, when and if they earn that profit, they must pay an income tax. 
The reason for that is, we tax profits and we tax income in order to 
pay for our common defense, in order to build roads, and do a whole 
series of things in this country that we need to do together. But we 
have some who do business in this country that pay no taxes. I 
especially point to the foreign-based multinational firms. The GAO 
report says they come to this country and approximately 74 percent of 
them doing business here pay no U.S. income taxes. Those who are 
listening to this will be surprised to learn that the brand names they 
are well familiar with every single day, often the brand names on 
foreign products sold in the U.S., mean that someone has done a lot of 
business here, made a lot of profit here, and ended up paying zero in 
income taxes. In my judgment this means they are unfairly competing in 
this marketplace.
  U.S. businesses with whom they compete in this marketplace, if they 
are doing so only in the U.S., must pay a tax on their income, and so, 
too, should foreign-based corporations doing business in the United 
States through their subsidiaries.
  Madam President, with that, I yield the floor and I suggest the 
absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Ms. COLLINS. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Sessions). Without objection, it is so 
ordered.

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