US loosens its rules on taxes for multinationals

THE US Internal Revenue Service, responding to international protests, has issued new guidelines for taxing multinational profits, allowing companies more options to compute their US tax bill.

Among other things, Washington has backed off its insistence that foreign-owned corporations gauge their profits against US industry averages. On the thorny issue of transfer pricing - the value the firms place on intra-company sales - the multinationals will be able to choose among six methods of calculating their taxes, including one that would seek advance agreement on how profits would be split between a US subsidiary and other operations.

Trading partners, including Britain, have complained that the comparable profit test in US proposals put forward a year ago seemed to violate tax treaties and expose companies to double taxation.

A report by an OECD task force on transfer pricing, issued last Sunday, also encouraged a more flexible approach to handling the issue.

Tax analysts said the new guidelines moved much closer to the approach followed by the UK Inland Revenue. A spokesman for the Organisation for International Investment, a trade group for multinationals, said it was encouraged by the apparent willingness to take account of its objections.

But the guidelines, due to come into effect in April, are temporary, partly because they have been issued in the final days of the Republican administration. President-elect Bill Clinton made repeated reference to transfer pricing during his campaign, suggesting the Treasury could raise an additional dollars 45bn over four years from foreign-owned subsidiaries.

If they are perceived as fairer, the new regulations could increase revenues by improving compliance, some experts suggest. But few believe Washington can recover more than dollars 2bn or dollars 3bn in revenues without a change in the tax code as it applies to the multinationals.