International Taxation: The Challenges of Regulating Transfer Pricing Manipulation in the United States

Some large foreign and domestic controlled multinational enterprises (MNEs) report zero income and zero tax liabilities to the U.S. Treasury. Taxpayers' underreporting of their tax revenues to the Treasury negatively affects government's tax base and essential services to taxpayers. To protect the government's tax base, the U.S. Treasury updated the 1968 transfer pricing regulations of intercompany services in 2006. The purpose of this quantitative study was to address the following 2 research questions. First, it examined how effective the updated transfer pricing regulations of intercompany services were in preventing MNEs from underreporting their income in the United States. Second, it assessed how the changes in the IRS enforcement budgets affected the income MNEs reported to the U.S Treasury between 2000 and 2009. The theories of tax equity, economics, and strategic management guided the study. A control group time-series and regression analysis showed that MNEs reported increased income in the United States after the implementation of the updated regulation. Regression analysis also showed that changes in IRS' enforcement budgets had no direct relationship with the income MNEs reported in the United States. The study's findings and recommendations should benefit U.S. business taxpayers and lawmakers directly. Recommendations for action include a reduction of U.S. corporate income tax rate and amendments to U.S international tax provisions. The implementation of the recommendations would result in new business investments and new job creations in the United States. The potential new business investments and jobs would result in positive economic and social changes to U.S. business taxpayers in particular, and to the U.S. economy in general.