Researchers at Pennsylvania State University and Florida International University have released a disturbing study showing that fake pricing schemes for import-export transactions are defrauding the federal government of well over $50 billion annually.
Consider the following: Razor blades imported from Britain for $113 apiece. Tweezers from Japan for $4,896 each. Cut rubies from Burma for $38,192 per carat. And for U.S. trading partners, exporting car seats to Belgium for $1.66, missile launchers sold to Israel for $52, or bejeweled wristwatches sold to Columbia for $8.68.
Simon J. Pak, a finance professor at Pennsylvania State University Great Valley, and John S. Zdanowicz, the director of the Center for Banking and Financial Institutions have been studying government records for over a decade, and believe that this kind of pricing manipulation to shield U.S. Income Tax obligations is widespread.
"We do not cast wary glances at their stuff," Customs Service spokesman Dean Boyd said of the analysis. "It's very serious, because you can do this with any commodity."
The process is relatively simple. For example: A Japanese automaker manufactures a car radio for $100, but its U.S. subsidiary buys it for $199, then sells it for $200. The company's bottom line hasn't changed, but the taxable profit in the United States is now just $1 instead of $100. A tax bill that would have been $34 is reduced to 34 cents.
Conversely, if a U.S. manufacturer exports a bulldozer to its Colombian subsidiary for $1,742; the Colombian company sells it to a buyer for $28,000. The U.S. company's cost of producing the bulldozer can be written off its income taxes , but the profit from the sale would reside in Colombia. That profit would be subject to U.S. taxes only after it is "repatriated" across the border, presumably in a bad economic year when the company's taxable U.S. income is low or nonexistent.
Sen. Byron L. Dorgan, who secured a $2 million grant for the research, wants the U.S. government to sit up and take notice. "The IRS and the Treasury have been in a deep sleep on this subject," Dorgan said. "I want Treasury and the IRS to look at this, to say this is a big, serious problem."
Zdanowicz said the government "is shutting down the front door on the illegal movement of money, focusing on banks, insurance companies and other financial institutions. But the back door is wide open, international trade."