I made this video a while away (I don’t even recall those glasses!) but since I’ve been asked about transfer pricing and this seems to do the job I thought I’d put it up again:
The Tax Justice Network has just published a blog on a new EU report on transfer pricing and developing countries.
As they point out, from the outset the report is covered in warning signs about its likely failure to be impartial since the title page carries the following logo:
Why the problem? TJN explains in depth, and I warmly recommend their blog. But I’ll add these issues:
a) PWC are emphatically opposed to country-by-country reporting which has greatest prospect of providing developing countries with the risk assessment data they need to determine which transfer pricing cases to pick. You can’t promote good transfer pricing practice and oppose the availability of data to make it possible.
b) PWC act for the corporates doing much of the abuse.
c) PWC are found in all the world’s major tax havens – where much of the ill gotten gains of abuse are likely to be stashed.
To put it another way – PWC are completely conflicted on this issue meaning anything they write lacks any objective credibility. And given that this issue is so big that’s a disaster when the resources dedicated to this issue are so limited.
I was amused to find this on the KPMG UK web site under the heading Tax Efficient Supply Chain Management:
TESCM integrates supply chain design with tax optimisation delivering significant increases in profits. It is based on the premise that incorporating tax arbitrage into supply chain structures (typically by optimising the location of the key supply chain functions, assets and risks) realises benefits well beyond conventional operational savings on their own. TESCM is especially topical as tax authorities are challenging traditional tax planning structures and products. At the same time businesses are changing their operating models in response to the economic downturn.
Now let’s remind you first of all that KPMG operates in 47 of the 60 secrecy jurisdictions surveyed by the Tax Justice Network as part of its Financial Secrecy Index work. The reality is that if a place is a major tax haven / secrecy jurisdiction then KPMG is there.
And next let’s unpack what their web site says.
“Tax optimisation”: = tax avoidance to transfer tax due into private profit
“Tax arbitrage” = trading off the tax system of one state (usually a place like the UK) against the tax system of another state (usually a tax haven)
“Optimising the location” = artificially transferring or relocating solely to get a tax gain
“Relocating risks” = claiming risk is in tax havens through reinsurance contracts, hedging and other artificial means which have no overall impact on the overall profit or loss of a deal
“well beyond conventional operational savings” = we’re bereft of entrepreneurial insight but we know how to play the tax system for the advantage of the already well off
“tax authorities are challenging” = so let’s relocate things to secrecy jurisdictions where they’re hidden from view
“changing their operating models” = we don’t try to make money anymore, we just try to abuse the tax system – it’s easier than the hard work of actually making things
“economic downturn” = nobody wants what we make so we’ll capture state revenues instead.
So what does all this actually mean? Simply this: KPMG will shift key parts of your supply chain into tax havens, setting up insurance, licensing, hedging, marketing, transport and other supposed functions in those locations each of which can take a chunk of the profit and leave it there tax free – an activity all being heavily promoted by George Osborne who has, by promising a move to territorial taxation in the UK guaranteed that all such profits will stay out of the UK tax net. Talk about looking after his friends and guaranteeing his own future income from grateful companies!
That’s modern capitalism for you, in a nutshell. Just a giant con-trick because it’s bereft of any real innovative or entrepreneurial ideas.
And KPMG are, of course, pillars of society for doing this: something that their apologists repeatedly say does not happen, but which they’re openly advertising.
Time for a reappraisal, I think.
And it’s also worth a mention that there’s something that could easily expose this abuse: it is, of course, country-by-country reporting. No wonder the Big 4 and their clients are so heavily opposed to it.
Note: I was trained by Peat Marwick Mitchell & Co, now KPMG. I left a long time ago, and for good reason.
A United Nations Development Program (UNDP) commissioned report from Global Financial Integrity (GFI) (one of Tax Research LLP’s partners in the Task Force on Financial Integrity and Economic Development) on illicit financial flows from the Least Developed Countries (LDCs) was presented for discussion yesterday at the United Nations Conference on Least Developed Countries hosted by the Republic of Turkey.
Written by GFI Lead Economist Dev Kar, the report, Illicit Financial Flows from the Least Developed Countries: 1990-2008, examines how structural characteristics of Least Developed Countries could be facilitating the cross-border transfer of illicit funds, discusses methodological issues underlying estimates of illicit flows, presents an analysis of the magnitude of such flows, and makes policy recommendations for the curtailment of these illicit flows.
In her opening remarks for the UNDP Conference yesterday, UNDP Administrator Helen Clark said,
Illicit flows seriously impede LDCs’ efforts to raise resources for social and economic development. These flows are often absorbed into banks, tax havens, and offshore financial centers in developed countries.
Key findings of the report include:
Illicit flows divert resources needed for poverty alleviation and economic development.
Approximately US$197 billion flowed out of the 48 poorest developing countries and into mainly developed countries, on a net basis over the period 1990-2008.
The top ten exporters of illicit capital account for 63 percent of total outflows, while the top 20 account for nearly 83 percent.
Based on available data, African LDCs accounted for 69 percent of total illicit flows, followed by Asia (29 percent) and Latin America (2 percent).
Trade mispricing accounts for the bulk (65-70 percent) of illicit outflows from LDCs, and the propensity for mispricing has increased along with increasing external trade.
The top exporters of illicit capital (cumulative outflows) are:
Bangladesh, US$34.8 billion,
Angola, US$34.0 billion
Lesotho, US$16.8 billion
Chad , US$15.4 billion
Yemen, Republic of, US$12.0 billion
Nepal , US$9.1 billion
Uganda, US$8.8 billion
Myanmar, US$8.5 billion
Ethiopia, US$8.4 billion
Zambia, US$6.8 billionThe factors that drive illicit flows from LDCs may be broadly classified into three categories—macroeconomic, structural, and governance-related. It is likely that structural and governance issues are driving the bulk of illicit outflows, but this needs to be examined on a case-by-case basis.
The GFI report on LDCs was commissioned by UNDP as a contribution to the United Nations IV High Level Conference on the Least Developed Countries in 2011.
The true price of Mother’s Day
Country-by-country, Development, Tax avoidance, Transfer Pricing
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Apr 032011
Mar 292011
AstraZeneca has settled a long-running tax dispute in a deal which sees HM Revenue & Customs refund tax payments that will now go to America instead.
The pharmaceutical company announced on Monday morning that US and UK tax authorities have reached an agreement over where it declares certain profits. The dispute over so-called “transfer pricing” dates back to 2002, and was the most significant of AstraZeneca’s ongoing arguments with tax authorities.Under the agreement, AstraZeneca will pay out a total of $1.1bn (£689m) in taxes, substantially less than it had budgeted for. This means the company can unlock some of its outstanding tax provisions, increasing its earnings this year by $500m and raising its profit targets by almost 7%.
Its effective tax rate will also be slashed from 27% to 21%.
The deal means that AstraZeneca will receive tax refunds in several other countries, as profits are booked in the US instead. A spokeswoman confirmed that HM Revenue & Customs will hand back an undisclosed tax payment, which will then be passed on to America’s Internal Revenue Service (IRS). She declined to say how much this would be, but insisted it was less than the headline figure of $1.1bn.
Throughout this period AstraZeneca was, of course, an active tax lobbyist. The AstraZeneca FD Jon Symonds, since 2007 with Goldman Sachs, did for example whilst at AstraZeneca chair the 100 Group of FTSE FDs. And just by chance whilst he was in that role he ensured that the FTSE 100 gave £5 million to fund the Oxford Centre for the Non-Taxation of Business. This was taken at the launch event:
At the launch reception, from left to right: Jon Symons, Chair of The Hundred Group; Dave Hartnett, Director General HMRC; Judith Freedman, Professor of Taxation Law, University of Oxford; Chris Wales, Goldman Sachs; Colin Mayer, Professor of Management Studies, Said Business School. (Photograph by Greg Smolonski).
Or as Accountancy Age put it:
The great and good of the tax world gathered to listen to Hundred Group chairman Jon Symonds and HMRC director general Dave Hartnett share a platform with a handful of handpicked and distinguished academics.
The exchange was mostly amicable ¬? Symonds and Hartnett are, after all, highly professional, polished and have worked on too many committees together to be anything other than cordial.
And yet the question remains – are such links appropriate when there is so much tax in dispute? I’m not sure. And can a company in such dispute sit on committees setting tax policy? Again, I’m not sure.
PS Accountancy Age are slightly incorrect in their reporting. Someone called Murphy asked some awkward questions at the same event, and for good reason, as history has proven.
Feb 152011
The above title is also to be found in Forbes, where Lee Shepherd has written an article under that heading.
She does three things in that article. First of all she explains the extraordinary phenomenon of UK Uncut; a tax protest appropriately aimed at corporate tax abuse.
Secondly she explains what that abuse is and how the UK government is complicit in facilitating it.
Thirdly, she laments the fact that no replication of the protest is likely in the USA.
The article is long, a little wonk-ish, and well worth reading in full. From my perspective I’m pleased to see that she supports my concern about the introduction of territorial taxation, expressed here yesterday. As she says (and I have edited a lot):
The protests have hit multinationals where they live, so that the campaign has been much more effective than the bog-standard one-day picketing of the Whitehall government offices in London. But Whitehall is to blame. A lot of the objectionable nonpayment of tax by British multinationals is completely legal, and approved by both major political parties.
What prompted this outcry? The participants in Uncut UK are making the logical connection between Cameron’s spending cuts and the lack of revenue from the most fortunate segments of British society.
The policies Uncut UK is targeting were initiated by the previous Labour government, only to be expanded in generosity by the current government. The recently adopted corporate tax policy is called territorial taxation, which means that multinationals owe no tax on their foreign business income to their home government.
Combined with transfer pricing, territorial taxation is an open invitation to multinationals to have as much income as possible treated as foreign.
Territorial taxation makes transfer pricing problems worse. How is that possible? It raises the stakes. A multinational that successfully shifts income out of a high-tax country with developed consumer markets and paved roads, such as the United Kingdom, gets the full benefit of the low or nonexistent tax rates of the tax haven to which the income is shifted. There is no further tax on repatriation of that income.
That’s it in a nutshell: the UK government is deliberately introducing a system of tax that is almost impossible to police, as Shepherd argues, and which is bound to reduce the contribution the UK business makes to UK taxation revenues.
Is there any real surprise that people are really angry as a result?
Hand-in-hand, working together, an elite that spreads from business to government, and back again is ensuring that the rest of us transfer our wealth to a tiny minority in society. This tax reform is part of that process.
Why can’t they see that this is not sustainable?
Hat tip to Nick Shaxson, TJN
I have suggested before, and I will suggest again, that transfer pricing is contributor to the tax gap.
Oddly (!) the tax profession – and especially those parts with links to secrecy jurisdictions – deny this.
Many are not convinced by such arguments. Take this testimony given by the IRS to Congress in July:
Testimony of Stephen E. Shay
Deputy Assistant Secretary (International Tax Affairs)
U.S. Department of the Treasury
Before the U.S. House Committee on Ways and Means July 22, 2010Chairman Levin, Ranking Member Camp and members of the Committee, thank you for the opportunity to testify on the important topic of transfer pricing. I will focus my testimony today on Treasury’s analysis of the available data relating to the issue of whether profits are being shifted abroad out of the United States for tax purposes through the mechanism of related party transactions or, as the mechanism is more commonly known in the tax policy community, through transfer pricing.
We conclude, based on our analysis of available data, that there is evidence of substantial income shifting through transfer pricing.
My emphasis added.
And as they note – there’s a very odd correlation between tax rate and profits in MNCs. As the tax rate of a jurisdiction goes up reported profit in relation to sales goes down – and the IRS do not believe that is because of costs, very clearly.
The answer, of course, is clear – as the evidence on evidence also showed. Country-by-country reporting would help enormously in tackling this issue.
US – transfer pricing abuse is rampant
Corporation Tax, Tax avoidance, Tax gap, Transfer Pricing
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Aug 062010
As I’ve noted this morning – South Africa is worried it is suffering transfer pricing abuse to exploit tax arbitraging.
So too is the USA. The following story appeared in Bloomberg news whilst I was away, written by Jesse Drucker. As I talk to Jesse (and Kim Clausing to whom the article refers) a fair but I hope they’ll forgive extensive quoting:
A U.S. tech company identified only by the pseudonym “Delta” generated as much as 55 percent of its revenue domestically while reporting to shareholders that only 10 percent of its pretax income came from U.S. operations, according to a report presented to the House Ways and Means Committee.
By attributing more earnings to countries with lower tax rates, including the Netherlands and Singapore, “Delta” cut its worldwide average tax rate to less than half the 35 percent rate in the U.S., said the report by the Joint Committee on Taxation, presented yesterday.
Such income shifting, gleaned from actual tax returns in a rare glimpse into the tax structures of six U.S. multinational companies, reflects a strategy that critics call abusive. Companies that use it may be depriving the U.S. treasury of as much as $60 billion a year, according to a study published in December by Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.
Multinationals “shift the burden of paying for our national security and homeland security and other public services to small businesses and family taxpayers, who play by the rules and do not engage in these shenanigans,” said U.S. Representative Lloyd Doggett, a Texas Democrat who is on the Ways and Means committee.
That panel, which oversees tax legislation, examined transfer pricing, the system that companies use to allocate their expenses and income among subsidiaries in different countries for tax purposes.
In the report, six companies were assigned false names — Alpha, Bravo, Charlie, Delta, Echo and Foxtrot. The pamphlet cited percentages for their revenue and pretax income, not real dollar amounts.
The Joint Committee, a nonpartisan congressional body that researches tax issues, chose companies that reported effective tax rates at least 10 percentage points lower than the U.S. statutory rate for a period of years, along with large gaps between the countries in which they reported sales and the countries in which they reported earnings.
The research also relied on public data to piece together how U.S. multinationals cut their tax bills by shifting income overseas. Much of the savings came from the companies’ entering into licensing and other transactions with subsidiaries in low- tax jurisdictions.
“Delta,” which the committee identified as “a publicly traded U.S.-based multinational company that manufactures and markets technology-based consumer products,” performed research and development in the U.S. and deducted those expenses from its U.S. taxable income, the report said. Once a product was almost ready for sale, Delta licensed the rights to it to a Dutch subsidiary in exchange for a royalty.
The Dutch unit or an affiliate then manufactured the product and sold it to the U.S. parent company, thus shifting profits to the Netherlands, the report said. The average tax rate there was about 5 percent over the study period.
“Delta U.S. has licensed many of what have proven to be its most commercially successful products in this way,” the report said.
Doggett has proposed legislation that seeks to curtail that practice. It would require companies to be liable for U.S. taxes resulting from innovations they developed in the U.S., even if the company licensed the property to an overseas subsidiary.
The committee report questioned whether tax regulators can adequately gauge if U.S. parent companies are paying too much to their offshore subsidiaries in such cases — or whether the foreign units are paying too little to the parent — thus shifting income overseas. U.S. Treasury Department regulations require “arm’s length” prices, or the amounts that would be paid between unrelated parties.
The report said “taxpayers that develop unique intangible property rarely, if ever, transfer that property to third parties.”
The Obama administration has proposed some changes to transfer pricing, including one that would essentially provide for a minimum tax on profits earned in low-tax jurisdictions overseas.
The same things happen in the UK of course.
But still the tax gap deniers say that such things do not go on.
And that is blatant misinformation.
