Moving Toward Tax Equity : Japanese company’s accord with IRS could become a model

Multinational companies doing business in the United States now owe $32 billion in back taxes, the Internal Revenue Service contends. That disputed tax bill might go even higher if Bill Clinton, as President, makes good on his extraordinary promise to collect $45 billion in additional taxes from such companies. At issue are the accounting practices of multinationals, some of which are accused of understating profits.

Japan’s largest consumer electronic company has set an example that should be followed by other foreign firms. Matsushita Electric Industrial Co., which markets its products in the United States under the names Panasonic, Quasar, National and Technics, has reached an agreement with the IRS on a formula to calculate its taxes.

The multinationals, including some U.S. firms, challenge the IRS’ contention that they artificially inflate the prices of goods and parts sold to their U.S. subsidiaries. The higher prices reduce the calculated profits--and taxes--of the American units. The IRS introduced its advanced-pricing formula in 1991 in an effort to head off these disputes. The agency uses corporate data, some of it classified, to determine appropriate prices for imports.

Matsushita is the first Japanese company to agree to the IRS formula, which has been used by five U.S. and foreign multinational companies to settle similar disputes. Matsushita agreed to a range of prices in three product categories for fiscal 1991 and 1992.

Clinton and many members of Congress maintain that foreign companies in general are not paying their fair share of American taxes. Matsushita’s example may lead other multinationals to enter similar agreements. One hopes so. A deficit-ridden United States cannot afford to carry on these disputes interminably. Nor can such continuing disputes help ease the growing tensions over international trade.