A public watchdog and advocate for fishermen and their coastal communities. Taufen is an "insider" who blew the whistle on the international profit laundering between global affiliates of North Pacific seafood companies, who use illicit accounting to deny the USA the proper taxes on seafood trade. The same practices are used to lower ex-vessel prices to the fleets, and to bleed monies from our regional economy.
April 4th, 2006Challenging a Bad Merger is Your Job:
March 28th, 2006Contemplating Trident & the Fish Matrix
March 24th, 2006Ocean Reform School Needed:
March 16th, 2006ADF&G's Campbell: The Betrayer
March 7th, 2006Fishing-Dependent Communities
February 27th, 2006GAO on DAPs: Councils Lack Effective Participation Framework
February 16th, 2006Council Scared of Capitalism: Serves Transnational Masters Instead
February 16th, 2006Tensions High at Advisory Panel on GOA Privatization
Tax Time & ATP: as Ratz Flee ShipAnd once again time to write on your payment checks and tax forms the following words, "Stop Abusive Transfer Pricing in the North Pacific Fishing Industry!" Fishermen file to IRS offices around the Nation, and by that simple act, you will be honorably protesting that if individuals and small businesses have to pay taxes, then so do the multinational fish corporations to whom they sell fish.
All you have to do is look at Gunnar Knapp's own presentations to see that from 1992 to 2002, there has been a $1 billion ANNUAL drop in total ex-vessel value for Alaska's fishermen, and you will know that a grave harm is being done. This revenue-shifting also has tax consequences, as fishermen generally pay at higher tax rates than do the multinational fish giants: especially if they practice Abusive Transfer Pricing. Read the 1995 article from the AIFMA Leader to understand that further.
When the Magnuson Fisheries Act was passed in 1976, it envisioned the "Americanization" of the North Pacific Fisheries under 200-nautical miles. The economic proxies who would receive the benefits of this exclusive economic activity were to be a marriage of processors and fishermen - both of United States residency and allegiance. By not creating a national resource price, the federal government was spurring investment by domestic parties as it slowly moved foreign fleets out of the EEZ.
But, as foreign-investment and -ownership has come to dominate our Alaska fisheries, the Nation has not received adequate compensation. And as foreign-dominated firms practiced illicit bookkeeping tricks in the conduct of trade, they created "an alternative essence of management" from that promised under the MFCMA.
By June of 1977, the chairman of the New England Fish Company - then the largest and most multinational of US seafood firms - wrote to President Jimmy Carter and warned him to establish a national strategic policy regarding our seafood resources. C. Reid Rogers went on to outline how already - just mere months after the Act's passage - excessive foreign investment was an economic threat to true United States firms.
Now, we can see an industry dominated in a large fashion by the Japanese fishing giants who were supposed to be pushed out during post-MFCMA realignments, so that American firms could participate. Instead, what Japan fish giants could not have even before the 1976 EEZ & MFCMA - what they shared with Korea, Germany, Russia, Poland and others in the North Pacific - has been recaptured, and more.
As Groundswell whistle-blowers can attest, this was accompanied by multi-billion dollar tax evasions. So, we sure hope you take our advice and write those words on your tax forms, checks, deposits, etc. for the next year. It happened in the mid-1990's enough to get the Commissioner's attention. Let's do it again!
Go to your room!
At the recent Council meeting, Groundswell sent the Council members to their room - by means of the Pledge of Allegiance - and Lu Dochtermann followed-up by scolding the children who do not understand the meaning of the word "No!" But though we said, "go to your room, and wait until your father comes home!" we are not ready to let them come out of their rooms, yet. The Tundra Telegraph is already buzzing, but you'll have to wait for the next post for the "dad comes home" piece.
Ratz Flee Ship for Respite!
In another unusual move, the talk around the April Council meeting was that it was Governor Frank Murkowski who ordered the Chair (Stephanie Madsen-san) to take no action on GOA Ratz at the current meeting, then to turn June into a listening session, and that it will be removed from the October schedule altogether - Dutch Harbor being such a lovely place, what with Tom Enlow, chair of the Advisory Panel managing the Japanese-owned hotel there, and all. No one wanted shades of 12-0 Crab Ratz racketeering to pop up again, I guess. Of course, no one mentioned August fish meetings - so that's surely where the hidden action will take place.
But don't you find it a bit out of place that it was a governor of one state who ordered the stand down of GOA Ratz? Did he consult with the governors of Washington and Oregon, first? With Dr. Hogarth, head of NOAA Fisheries, before that? Not sure, but we were just wondering how the power structure works here, and whether or not the Federal government is still in charge of its regional fish councils.
For now, it is time to post something for the readers about Transfer Pricing and how it gets abused. So, happy Tax Time and here we go:
Transfer Pricing Affects Fish Catch and Sales Prices
[Revised 1995 article sent to Bristol Bay fishermen in THE AIFMA LEADER]
North Pacific fishermen wonder why fish prices seldom seem linked to final market prices. Grounds prices in many species are on the decline though final consumer prices often are not. You may have asked, "How do these large gaps occur and who really ends up with the profits? Are other forces, such as global tax avoidance, at work?"
Japanese ownership of U.S. processors and investments in the fishing industry are increasingly suspect as an anti-competitive force. After all, Japan is the leading consumer of much of Alaska's seafood products. Suspicion runs high that U.S. managers are often under some type of foreign "directive and control" when it comes to setting fish prices paid to processors or even fishermen.
Structure implies Strategy! And multinationals operate in a world of economic globalism, wherein they must make global-level decisions that often ignore government restrictions, such as taxes.
For seafood, the multinational structure often runs from the grounds to the final retailers in Japan's markets. So, the majority of our North Pacific seafood goes to Japan through a layer of importers who are scantily distinct from the multinational enterprises (MNEs) who parent many foreign-controlled processors to whom fishermen deliver the lion's share of the catch.
And since Japanese trading firms often act collectively, opportunities for restraint of trade from cartelized activities exist. Likewise, Japanese banks and buyers financed much of the industry's debt, and by matching it with tough pre-season sales agreements that allow them to procure the product they desire.
The ongoing Bristol Bay salmon price-fixing lawsuit reflects these concerns. Likewise, there are loud echos in the hallways of the inshore-offshore pollock allocation debate from voices which gasp at Japan-led requests for a greater shoreside percentage. Underlying competitive concerns, by offshore firms who may not be foreign-owned, is the commonly shared concern by independent harvesters over their delivery price to all processors.
An Alaska State economist, Mr. Gunnar Knapp of the Salmon Market Information Service stated in 1994, that "There is nothing written that says prices paid to fishermen need to be fair." Is Mr. Knapp correct?
Well, the U.S. has had tax laws on the books for many years regarding international product transfers between related affiliates of a MNE, or similar cross-border transactions.
These "intrafirm transfers" are covered under Internal Revenue Service Tax Code section 482 - known as Transfer Pricing. Since the 1930's, the IRS has watched over such opportunities for "milking off profits" and "loading-in expenses" without paying a fair share of U.S. taxes. When abusive, these actions are often called "product laundering."
Transfer pricing (TP) is a complex issue of great magnitude. It is the leading tax issue for international business. Let's see if we can define it and show how it influences fish prices and affect regional economic rewards from fisheries.
A 'transfer price' is the price charged by one company to a related company, whenever they allocate income and expenses among themselves.
At issue in U.S. fisheries is the price that an affiliated subsidiary charges for resources obtained and processed in the U.S., which were transferred as products to its overseas parent. On the other hand are expenses the foreign parent charges to the U.S. subsidiary for management services, technical know-how, equipment costs, labor or other services provided.
The latter can be falsely "loaded-in costs" which may bear no relationship to the actual factors underlying the production requirements themselves or U.S. nexus needs. Such expenses, and especially royalties, are large objects of scrutiny by tax authorities.
According to John Fraedrich and Connie Rae Bateman in a 1996 article entitled "Transfer Pricing by Multinational Marketers: Risky Business" such "TP policies sometimes reflect competitive dynamics set by default or in line with competition, cost and profit objectives to promote the efficiency of the seller, or resource allocations decisions... [for] extra resources needed on the value-added end of production,".
However, the underlying concern is often global taxes and where to pay them. Transfer pricing decisions are made daily within multinational corporations for both tangible and intangible outputs in "intrafirm exchanges" among their affiliates or subsidiaries. The bottom line at IRS is whether or not the U.S. company properly reflects income attributable to its operations within the U.S., or whether its foreign parent is using pricing strategies to avoid higher effective U.S. taxes.
In a 1979 Pacific Rim Studies report "Foreign Investment in the U.S. Fishing Industry", authors Jeremiah Sullivan and Per Heggelund predicted that among the problems of Japanese ownership in North Pacific fisheries would be the repatriation of profits by using transfer pricing practices. Although they may not have understood how abusive these practices could become, they clearly understood that its effects went beyond the taxes lost and revenues denied to our communities through multiplier effects.
They stated that the most devastating effects would be that U.S. domestic investors might conclude that investments in seafood companies would be unwise due to the false level of unprofitability these foreign firms would demonstrate after practicing such repatriations using abusive transfer pricing. Now, we can easily conclude that they were correct and the industry has gone beyond the economic 'peril point' of foreign ownership and control.
Another tragic feature in today's world of globalization is that many CPAs are now earning a large part of their income, at a harm to the U.S., by showing these MNEs the "tricks of the transfer pricing trade". They do so despite holding public licenses requiring standards of "honesty and integrity" in the public trust.. Often using dollars already "milked-off", MNEs simply use such 'certified public accomplices', and tax attorneys, to fight off any IRS inquiries.
IRS international exam powers are based on the concept of whether or not such 'controlled transfers' take place under the same market influences as uncontrolled transactions between separate firms responding to normal market forces. That is, "Are prices determined 'at arm's length' to clearly reflect the income of any such organization?"
Under section 482 rules, the IRS can simply reallocate the "correct" level of profits to the U.S. side, but it seldom recaptures the full amount of taxes unpaid. Meanwhile, the net-of-tax revenues also remain overseas. Such outbound shifts are a real concern for economists, since they bleed away the revenues, which through multiplier effects are key drivers of regional economic health, and underlie a lack of jobs.
In the Alaska seafood industry, we can ask if a foreign parent company is "milking profits" away from its U.S. subsidiary by Abusive Transfer Pricing. ATP is where prices and costs are clearly set arbitrarily to satisfy global tax strategies rather than the true, underlying economic circumstances. At the least, this means the U.S. processor has less cash on hand when it comes to setting prices paid to U.S. fishermen.
Allowing abusive transfer pricing is like cutting the legs off of our fish price bargaining table before we even sit down at it to negotiate.
As the IRS pursues U.S. businesses who send our national resources overseas, an underlying concept is the establishment of a "fair and economically justified price" for those resources. The cost of fish landings is a key component of the price for U.S. seafood.
So - to counter Mr. Knapp's assessment - the fairness of fish prices IS directly tied to whether or not transfer prices were indeed fairly determined or "abused" U.S. tax laws.
The IRS has established a Seafood Specialty Group in the Seattle office to begin the investigation of many foreign owned firms on matters of global, intrafirm transfer pricing methods and whether or not there were abusive transfers. The National Marine Fisheries Service first approached the IRS on this matter in 1989. The author has also pressed hard for IRS scrutiny, particularly of Japanese-owned firms.
It can be criminal to deliberately scheme to deny the U.S. of its tax share. However, as a rule, the cases are usually handled under civil examination where the burden of proof lies on the taxpayer to convince tax authorities that it has used "basic arm's length standards". Consequently, the closest thing to an international standard method of evaluating cross-border transactions is known as a "comparable uncontrolled price" (which also applies to cost transaction values) - i.e., the CUP (or CUT) method.
Yet, the leading concern for fish harvesters, as the parties work out agreements in tax audits of MNEs, will be the possible establishments of "advance pricing agreements" (APAs) that fail to consider harm already done to harvesters. APAs address IRS section 482 issues where the taxpayer works out a formula or basis for transfer prices and allowable expense practices, to establish in advance how its future financial transactions will be viewed.
"Who is representing U.S. fishermen during APA-setting, and putting the legs back on the bargaining table for fish prices?" Also, "Who is representing the U.S. when it comes to the original Magnuson Fishery Conservation and Management Act's (MFCMA) 'spirit and intent' of Americanization - as defined by the highest overall taxable profits from our fisheries - to obtain the greatest overall benefits for our nation?"
After all, the U.S. decided not to charge a national resource price for the fish caught in its Exclusive Economic Zones (200-mile limits). Instead, a decision was made that two economic sectors - harvesters and processors - would 'marry' as the economic proxies to the rights of U.S. citizens for fishery worth and that both would contribute to regional economies.
The main economic artery created by that decision was to be the creation of income driving forces through revenues created by value-added processing in the U.S. The underlying rewards for citizens were tax contributions and domestic jobs and the household respending that accompanies them. Directly linked to the health of our communities, this squarely places ATP concerns among the most important issues in the industry.
Clearly, the balance of these proxy rights is the most basic and primary concern for policy making in the industry. There is an obvious need for proper evaluation of foreign ownership and abusive transfer pricing activities. Indeed, nowhere in this APA process is there a provision for third-party rights such as those of the fishermen to receive their portion in "an economically fair and justified price," especially if it has not yet been attained.
In many species, catch prices are cascading, denying the harvesting sector its rightful rewards. For that reason alone, the entire record of the Bristol Bay antitrust suit should be made public, and not protected by lawyer tricks of "confidentiality orders." That is an outright contempt of the American taxpayer's rights to know.
The North Pacific Fisheries Management Council (NPFMC) has great responsibility to U.S. citizens and taxpayers. The MFCMA should be changed to deny foreign "agents of influence" from surreptitiously operating under the mask of U.S. faces on our public agencies or during any testimony. The Act should also require the full disclosure of all financial documents and transfer pricing criteria to U.S. authorities, under strengthened guidelines that guarantee access to foreign owner's records to ensure fairness.
Groundswell calls for a "rising above gear issues, getting around onshore & offshore allocations, and going beyond a focus on species." Minor issues have distracted us from examining the truth of foreign ownership, exposing ATP, and following up on MFCMA with the second-generation legislation needed to truly obtain the maximum economic benefit from U.S. fisheries. We have forsaken alternative markets, welcomed a broken price mechanism, and created severed bonds between independent yet captive harvesters and their compromised processors who serve foreign interests.
Only if we are armed with the economic facts can correct policy result. Employing typical neo-classical economists will not attain this. Rather, start with a review of the history of the 'banana republics' of Central America, and "the grain merchants", or other agricultural examples.
Then, understand and apply the new paradigms of "competitive advantages within industry-segments", and toss out the stand-alone notion of "comparative factor advantages" and especially the incorrect theory of "free trade" between nations.
The global tax strategies of MNEs can readily prevent U.S. subsidiaries from paying for national resources at values reflecting fair market prices.
ATP strategies can keep currency rate changes and market forces from influencing your fish price. The current East Asian financial crisis will only increase the pressures for repatriation. Japanese banks will be under increasing pressures to lower all cash outflows through their U.S. subsidiaries, and that will mean lower fish prices. In effect, fishermen may directly subsidize the crisis.
So, as fishermen, you must become increasingly concerned and educate yourselves on the modern complexities of how these tax and trade issues work together against you.
Again - write on your tax forms and checks: "Stop Abusive Transfer Pricing in the North Pacific Seafood industry" (more simply, Stop ATP in NP Fisheries).
Stephen Taufen - Groundswell Fisheries Movement