Transfer Pricing: A Global Problem

From the December issue of Third World Resurgence comes this accessible, and potentially explosive, article (excerpt; warning: pdf link):

Transfer Pricing and Tax Evasion: Beyond the trans-Atlantic furore
Smitha Francis

...The charge facing US TNCs [sic] like Google, Amazon and Starbucks is that despite generating billions of dollars in revenue in the EU, they get away with paying little or no corporate income taxes in Europe by distributing their income between different tax jurisdictions. They use complex tax accounting strategies to exploit tax loopholes and differences in national corporate tax rates across Europe, which range from less than 10% to more than 30%...

...Starbucks had revealed that despite making a sales revenue of $398 million, it paid no corporate tax in Britain...

...In the case of Google, it has been brought to light that across Europe, Google’s customers sign contracts with the company’s subsidiary in Ireland, rather than with local branches. Thus Google records most of its international revenue at its European headquarters in Ireland, where the corporate tax rate is 12.5%...

...Amazon has its European headquarters in Luxembourg, another small country with favourable tax conditions for TNCs. Thus, while the company reported $11.6 billion in Europe-wide revenue in 2011, it posted an after-tax profit of only 20 million euros on those sales, and paid tax worth only about 8 million euros...

...Through manipulative transfer pricing between offshore companies, US companies transfer the money they earn in Europe to tax havens like the Cayman Islands, Bermuda, etc., and avoid paying US taxes as well...

...It is being argued that the huge revenue foregone through tax avoidance could otherwise be used to close the budget deficits in these countries and be spent on public services at home. This has been a long-standing public policy issue for developing countries...

...There are multiple impacts on developing countries from tax avoidance due to the combined effects of tax breaks for foreign investors and manipulative transfer pricing practices…For instance, it has been pointed out that foreign aid would be rendered unnecessary if Africa were to receive tax revenues that are rightfully theirs, but that the tax evasion strategies used by TNCs drain the continent of revenues.

It should also be noted that since the 1990s, developing countries have been saddled with institutional innovations such as fiscal rules and medium-term budget frameworks in support of more “balanced” fiscal policies. Given that tax breaks reduce government revenues (while helping TNCs to engage in strategic transfer pricing practices), such fiscal rules generate pressures to compensate this impact either by increasing tax in other areas, or by cutting government spending. Both of these will also have direct implications for inequalities facing developing country populations…The tax hikes will hit income tax payees and the companies which duly pay their share of tax, while lower income people and the vulnerable in society will be disproportionately affected by reduced social support because of the lower government expenditure.

Increasingly, FDI promotion has been couched in terms of integrating developing countries into global production networks for efficient production restructuring and export competitiveness. But the more integrated that a country is with TNC-led production network driven trade, the greater the possibility for manipulative transfer pricing practices...

TNC in the article, by the way, stands for a trans-national corporation or what we term as a multi-national corporation (MNC) locally. The article also covers the impact on developing and not just developed countries, and the effect of trade and investment agreements – and FDI tax breaks – on government finances.

Still want that FDI? Be careful what you wish for, you might just get it.