The Internal Revenue Service has increasingly been questioning methods of transfer pricing from a U.S. based parent company to an offshore subsidiary. Undervalued patent transfers allow companies to maximize their income in countries with low corporate tax rates, while providing U.S. parent companies with tax deductions for research and development expenses, thus lowering the U.S. tax bill on domestic profits.

According to the Commerce Department, 42% of all U.S. import/export trade last year, about $770 billion, involved intra-corporate transactions.

Ireland is a favorite haven, having a corporate tax rate of 12.5%, compared with 35% at the U.S. federal level, plus additional state taxes. American companies reported $18.3 billion in profit in Ireland in 2002, according to Commerce Department data, amounting to about 15 percent of Ireland's gross domestic product (GDP).

This tax regime has been particularly helpful to drug and computer companies, as much of their income flows from patents and licenses. Such U.S. companies as Pfizer, Abbott Laboratories, Intel, Microsoft, Oracle, IBM, and Apple have invested in low-tax countries in recent years.

Existing tax rules afforded companies to stockpile more than $650 billion in cash overseas. Many U.S. companies are repatriating those funds under a one-year tax holiday passed by Congress this year, which allows an 85% discount on tax liability. So far, about $200 billion at an effective U.S. tax rate of about 5.25 percent has returned, according to the American Shareholders Association. As much as an estimated $350 billion may be repatriated before the tax holiday expires, figures JP Morgan Chase.

The Treasury Department has issued new regulations limiting current cost-sharing arrangements which allow businesses to undervalue patents transferred to a subsidiary from a parent company. The new rules would require companies to value IP assets at the same price they would charge a competitor to acquire them.