Monday, January 12, 2015

Transfer Pricing and Illicit Money Flows

I wonder how many people caught this, and how many of those understand the significance (excerpt):

Singapore updates corporate tax guidelines to better align with West

SINGAPORE: Singapore is updating guidelines on an accounting practice mired in controversy for helping multinational companies minimize their tax bills, as the city-state moves more in line with a crackdown by Western governments on aggressive tax avoidance.

International taxation has come under scrutiny since a quirk of "transfer pricing" was found to have helped lower the tax bills of a number of multinationals, including Starbucks Corp , Google Inc and Inc.

Such issues prompted the Organisation for Economic Co-operation and Development to call on governments to revise tax treaties, tighten rules and share more information, in a project due for completion by the end of this year.

In transfer pricing, a company sets a price for a good or service to be sold between two of its subsidiaries.

The company can use the price to minimise its tax bill by having a subsidiary in a low-tax jurisdiction such as Singapore sell products to a subsidiary in a higher-tax jurisdiction at a high price. This allows the company to book more of its profit in the low tax location.

From Jan. 6, the Inland Revenue Authority of Singapore (IRAS) will require related parties to keep contemporaneous records to support the pricing of such transactions.

The IRAS also detailed methods by which transactions are benchmarked to show that prices charged would be similar if the transactions had been with a party outside of the company….

Approximately a fifth of the “illicit” capital outflows recorded by GFI from Malaysia due to trade mispricing run through Singapore. If Singapore fixes its transfer pricing rules, that’s one positive step towards fixing the practice, not just for Malaysia, but for the region as a whole.

Note to LHDN and Customs: we should be doing the same.


  1. Is Malaysia updating it's policies and guidelines along the lines of what Singapore is doing?

    Singapore, as usual, is taking preemptive action to avoid unfavourable mention by the OECD which is trying to enforce it's BEPS regime worldwide.

    If there is "trade mispricing run through Singapore", aren't the Malaysian companies that indulge in this practise equally culpable?

    Is Bank Negara, the tax authorities and the Customs doing anything to address the problem?

    Has Malaysia signed on to accept the BEPS regime?

    My understanding is that the BEPS focuses on transfer pricing. Is it also addressing the issue of trade mispricing?

    1. @bee farseer

      1. "Preemptive"? They've been resisting this for years. Note that the enforcement of these new rules will result in lower corporate tax revenue for Singapore.

      2. The "Malaysian" companies involved are the same ones based in Singapore (and China and Hong Kong). Transfer pricing is an MNC phenomenon.

      3. There is a multi-agency committee looking into this problem. Lack of data is a handicap, hence the importance of getting GST off the ground.

      4. Transfer pricing and trade mispricing are two sides of the same coin.

  2. I am not sure that I am included in the "trolls". Elves, goblins or pixies? Maybe. Definitely not fairies. Too many negative connotations.

    I am always amused when "trolls" attempt to link Singapore with illicit money laundering, transfer pricing etc.

    In the case of Malaysia, specifically, have any of it's tax laws and Customs checks been contravened by trade and transfer pricing "shenanigans"? Cases which have been successfully prosecuted in the courts?

    As for illegal money outflows, as per the GFI reports, I am sure that Bank Negara is perfectly capable of cracking down on this. Has it done so in Malaysia and has it sought the cooperation of other central banks in this regard?

    Or are you saying that Malaysia has all the necessary laws and regulations in place, but that enforcement is weak, lax or non-existent?

    I think that one should get one's house in order first before pointing the finger at others.

    1. @bee farseer

      Since the "shenanigans" occur outside of Malaysian jurisdiction, what exactly do you propose BNM should do? Especially since there really is no capital "flows" involved (i.e. no money exchanged), only a transfer of tax liability. I think that's one difficulty that everyone seems to have with the GFI statistics - they seem to think there's actual cross border flows of money, when with transfer pricing/trade mispricing, there isn't.

      The biggest weapon we could use would be to shift the basis of the tax system from domestic income to global income like the US has, but that's not something Malaysia has the political clout for. Even then, there are perfectly legal loopholes that can be exploited.

    2. @beefarseer

      Beforehand, I am moved to address you as your eminence given the very wise and insightful analysis and comments that constantly pour from your keyboard. You have indeed been a beacon of knowledge and a purveyor of insightful critiques that should leave the resident economist, beetroot red.

      Of course, the "troll" was not aimed at your eminence. How could I even think of such an imputation?

      I sincerely apologize to your eminence for any offense caused. After all, your eminence has been a rather percipient commentator regarding all things economics. Some of your observations have indeed been gems of wisdom that will put administrators and specialists alike to shame.

      I humbly suggest, your eminence write in your suggestions to the Customs DG/Comptroller whoever and draw their attention to the deficiency that is bleeding this country dry. I suggest this since I had often noticed your eminence's profound knowledge pertaining to this issue.

      Correct me if I am wrong, but I think this must be the tenth time your eminence has provided the same answer to this troubling issue. Again my apologies, your eminence, for causing so much emotional discomfort and intellectual pain. After all, those newspapers I mentioned are highly discredited broadsheets who are on par with the National Enquirer.

      Thanking you in advance for any forgiveness forthcoming.

    3. No worries, mate. Thank you for your magnanimity.

      Btw, "Eminence" is usually used as a honorific for the Cardinals of the Catholic Church.

      But I am sure that you would not be so dastardly to conflate religion into an economics blog, would you?

    4. I like your description of ISIS as a "fringe cuckoo" movement.

      But these are cuckoos with guns, swords and a mindset that murder is perfectly ok.

      As for the good ole US of A, I am enamoured of it's cars (so cheap), food (lagi cheap) and the bikinied babes that roller skate in Santa Monica.

      Maybe we do share some views in common.

  3. My views are from the perspective of business rather than economics. The transfer pricing is the standard modus operandi of the MNCs to repatriate money back to the HQ. This is even covered in the standard texts for MNCs for pricing.

    I think it is very hard if not impossible to stop MNCs from doing this. I am sure BNM is aware of this and basically from my point of view it is not illegal or even unethical. It is the easiest way to move funds back to HQ. If Malaysia cracks down on this, we will be less attractive to investors.

    The flow to Singapore happens as most of the MNCs have their regional HQ there and the payment is being processed by legal entity established there. This is done for financial and tax reasons. Singapore being the financial hub and also having the lowest corporate tax rates are the main reasons.

    However I am quite surprised to see Malaysia so high on the GFI list. Granted Malaysia has a very large export volume by MNCs but this cannot explain the high ranking as other countries too suffer from transfer pricing. Unless of course this is because Malaysia has better data that exposes these outflows.

    Personally I would expect other countries with large exports (Thailand, Mexico, etc) to have higher outflows as they too should face the same problem.

    1. @Calvin

      Pardon me if I am being presumptuous but I think you have your knickers in a twist.

      On the one hand, you say it is not illegal or unethical and then you go on to imply that these MNCs "reroute" through Singapore because:

      "This is done for financial and tax reasons. Singapore being the financial hub and also having the lowest corporate tax rates are the main reasons."
      Like many deluded others, you simply gloss over the fact by mentioning low corporate tax rates but don't deny that the crux of the matter has been the thorny issue of tax dodging which has been raised many times over in numerous forums:

      ".........said the data demonstrated the need for Australia to be aggressive in its pursuit of companies that shift profits offshore. He said it highlighted the need for greater transparency around corporate transactions to establish which transactions were legitimate and not simply tax dodging."

      and the ancillary concern related to all this is the laundering of money by criminals, terrorists, drug barons etc via shell companies, a major concern when it comes to low tax jurisdictions with opaque banking secrecy laws.

      Take for instance India, a victim in the circumstances:

      You cant deny all these reports and official statements from legal entities unless you are an ostrich burrowed into its own delusions. The very fact, the pressure is telling is implied in this capitulation:

      So after all these years.......???

      Eventually, nations wherever they be have to earn their money off the "honest sweat trickling off their own brow and the brain beating behind it" as my Chinese friend, who is a well known sage would put it.

      And certainly not set up low tax jurisdictions with opaque banking laws to hide behind and fleece others for a free ride and claim hard work, astute management blah blah blah in the bargain!

      And yes, the high ranking in the GFI also implies something else, the very same issues faced by Indonesia for instance:

    2. Yes, and the countries' tax laws allow it, as the OECD has accepted.

      That's why it has come up with the BEPS regime.

      And why wouldn't any responsible company want to minimise the taxes that it has to pay in the countries where it operates?

      The tax authorities of the countries that feel that they are hard done by these corporate manoeuvering can always haul the alleged culprits before the courts.

      How many such cases have been successfully prosecuted in Malaysia? In Indonesia? In India? In Australia?

    3. To some additional points. It is easier for countries like the US and the UK or Germany to crack down on such practices by enacting laws since these companies are legally established there and listed there. But in case of Malaysia, we do not have such advantage or leverage over these MNCs.

      Another key point that these outflows are hard to stop as the sales of these MNCs are generated mostly overseas. If these MNCs are evading taxes on local sales, then we will have legitimate ground to complain and take action.

  4. That's a logical and reasonable explanation.

    With nary a mention of trolls in it.

    You aren't, perchance, a fan of the fantasy author R A Salvatore, are you?

    There are plenty of dwarves, elves, goblins and trolls in his books.

    No eminences, though.

  5. Malaysia has its own Transfer Pricing Guidelines, under which the Inland Revenue does audit multinationals to seek retribution of Malaysia's 'fair' share of tax revenue which has ended up in some other, lower tax regime.

    We ordinary mortals would not have access to the number of such cases concluded, successfully or otherwise, since such info is rightly protected by official secrecy. Perhaps some MP could be persuaded to ask some pertinent questions in Parliament, since the Minister of Finance has the power to override the secrecy provisions.

    1. Has Malaysia signed up for the BEPS regime? I tried to find the info on the OECD website, but there seems to be no info there about which countries have actually adopted BEPS.

      I also don't see why the tax authorities aren't publicising the cases of transfer pricing peculiarities and tax evasion by MNCs operating in Malaysia unless they are worried that this will portray the country as "investor-unfriendly".

      Perhaps the authorities are putting more emphasis on moving the country up the international competitiveness and ease of doing business rankings than in cracking down on tax avoidance and tax evasion schemes by local companies and MNCs.

      I sincerely hope that this is not the case!

    2. As pointed out by calvinsankaran earlier, the repatriation of profits by subsidiaries is a feature and the raison d'ĂȘtre of an MNC. One step behind, so to speak, the relevant tax authorities attempt to claw back their 'rightful' share.

      The Transfer Pricing Guidelines are intended to be pre-emptive but in reality serve the purpose of allocating blame (and extracting penalties) in the eventuality of a successful tax audit.

      As regards official secrecy, I share your view. See, however, s.138 of the Malaysian Income Tax Act.