In the six years since the then Chief of Staff of the JCT pronounced transfer pricing enforcement to be dead, numerous case studies have demonstrated the truth of his observation, starting with the JCTs own examination of six US based multinationals (MNEs) in 2010 and followed by the Senate Permanent Subcommittee on Investigations hearings on Microsoft, HP and Apple in 2012-13. There is little doubt that the current transfer pricing rules, in conjunction with the dysfunctional Subpart F rules, allow US-based MNEs to shift most of their profits to low tax jurisdictions. It is estimated that there are currently about 2 trillion dollars of such profits that benefit from deferral and cannot be repatriated because they are not subject to foreign tax and therefore would be subject to full US taxation upon repatriation under current law. Hence the push to adopt territoriality and allow the MNEs to distribute these trapped profits as dividends to their US parent, which can then in turn use them to pay dividends to its shareholders. The OECD has recently come to recognize that the transfer pricing system does not work as intended. In its report on Base Erosion and Profit Shifting, the OECD recognizes that BEPS results in revenue losses that affect all states, especially poorer ones; that systematic tax avoidance by the richest and most powerful companies in the world undermines the general legitimacy of taxation; that it gives MNEs significant competitive advantages over purely domestic firms, resulting in inefficient allocations of investment and major distortions to economic activity; and that it skews the decisions of the MNEs themselves, resulting in overall economic welfare losses. This article will contrast three approaches to dealing with the BEPS problem: adopting a unitary taxation regime; ending deferral; and adopting anti base erosion measures. It concludes that while the first approach is the best long term option, the other two are more promising as immediate candidates for adoption in the context of US tax reform and the OECD BEPS project.



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