China, India, Brazil, Nigeria and now South Africa at the TJN transfer pricing conference in Helsinki all have the same things to say.
First, the OECD's arms length pricing model just odes not accord to the economic reality of what they see happening on the ground.
Second, the process is so complex it takes too long and they have far too few people able to really manage any challenge to multinational companies.
Third, the OECD model assumes there is information available on what are called 'comparables' - that is trading in similar goods and services undertaken between independent third parties - and that's just not true, either because there is no such trade or even if there is there is no data on public record.
Fourth, some say the political pressure not to collect the tax can be high.
Fifth,they need reliable data on what they've lost to give them a target of what to aim for.
Sixth, the OECD model massively underallocates profit to poorer nations because it allocates reward in the supply chain to where risk is - and far too often that risk is artificially relocated to tax havens - even though the commercial substance of the management of that risk is very often in their countries, which also bears all the risk of employing people who really make the products that are actually being sold at the far end of the supply chains that they're having to challenge to collect the tax due to them.
But, more than anything this is about getting data. Which is why I am presenting on country-by-country reporting tomorrow - because only that can solve this problem.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Richard
I am interested as to how this all applies to a company like Apple that sells products that it designs but doesn’t manufacture, so the majority of the supply chain is not owned by it. i can understand the argument that a multinational vertically integrated across a supply chain can merely allocate the profit where it pays the least tax, but in Apple’s case it can’t generally do that (apart from right at the end) yet still manages to capture almost all the profit in the chain.
Firstly, the developing country where the outsourced supply chain is located needs to deem the “captive” manufacturing contract as the creation of a controlling relationship. They then need to assess Apple on a part of the IP profit that they fail to allocate to that country. I’ll tell you: India and China are looking at this. And since Apple will have a presence in those places the opportunity to assess will exist.
Second, it reallocates profits from where the IP is – usually Bermuda – to where Apple has people ad customers. So the US, all EU countries and developing countries where sales are made will win. Bermuda won’t. But Ireland will: it can then have a tax base whereas right now it has none.
But on the first point, surely it is easy for Apple to just move production to another company in another country, they have already moved some production to Brazil and back to the US. I am all for China/India to get fair tax on the value added through the manufacture, but the true value is added through the design IP done in the US. And this can be seen by the fact the Apple products massively outsell competitors products made in the same factories and using mostly the same components. The fact they they may pay less than competitors for the same parts is due to their discounts for high volumes.
And on the second point, certainly the use of a tax haven to avoid tax on the IP on non-US sales is reducing the tax take for the US, but surely any attempt for non-US companies to get more of the IP profit as part of the sales process can just be avoided by exporting from the US to third party wholesalers (ignoring Apples’s retail stores for a moment). Why should the UK expect to get any portion of the profit that Apple makes in manufacturing and wholesaling its products that are sold in the UK. It obviosuly entitled to tax the profits in retailing the product.
So while I can see that Apple would end up paying more tax, it looks like the US would be the main beneficiary of that and any extra tax that developing countries would get could be offset by them losing some of the outsourced manufacturing either to other developing countries or even back into the US.
Bascially I can understand attacking the transfer pricing abuse in a vertically integrated multinational but fail to see how you do effectively in an outsourced model esp given Apple is already moving to multiple suppliers of almost any important part. And if I was the US, I would be very unhappy that other countries were getting any part of the profit relating to Apples design and marketing IP.
Well you may be unhappy
But let’s get real: the UK defends their IP for them
Now why in that case can’t we have a share of the tax due on it?
After all IP can only attract a premium under state granted monopolies – and therefore all states who uphold them are due a share of the tax on the resulting gain
Your thinking ignores these realities and hides behind the pretence MNCs and their lawyers wish to put forward
It sounds like patent rights are just too cheap. These are another monopoly right. However, governments connive in the game. This includes the Inland Revenue which approves only commercial tax return software running on proprietary operating systems, thus members of the public wishing to use electronic tax returns are tied to the commercial software companies and consequently adds to their monopoly advantage and the value of their IP.