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TRANSFER PRICING: How multinationals avoid Tax corporation….

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THE INTERNATIONAL TAX SYSTEM treats multinationals as if they were loose collections of separate entities operating in different jurisdictions, giving companies huge scope to move income around the world to minimise their tax liabilities.
 
One of the main vehicles of corporate tax avoidance is a practice known as transfer pricing. Under international rules, transactions between company subsidiaries are supposed to be priced as if they were conducted “at arm’s length” between unrelated parties. In practice, though, the price can be adjusted to move profits to the lower-tax jurisdiction and expenses to the higher-tax one. The more complex the transaction, the easier this becomes. Many tax-haven subsidiaries are essentially shell companies that exist only to hold intellectual-property (IP) rights and charge other parts of the group for their use or provide other “services” at above-market rates. Transfer pricing (really mispricing) is sometimes also used to load costs onto countries that offer generous subsidies, especially in extractive industries. It has become a key plank of multinational tax strategies.

Technology companies, with oodles of IP to shift around, are avid practitioners of the art. Google, for instance, avoided a tax bill of around $2 billion in 2011 by moving almost $10 billion into a unit in Bermuda, a jurisdiction that levies no corporate income tax. Bermuda is the legal residence for tax purposes of an Irish subsidiary which collects royalties from another Irish division which in turn had collected revenues from ads sold across Europe (a structure known as the “Double Irish”). To avoid an Irish withholding tax, the company added a “Dutch Sandwich” to its tax-planning menu, routing the payments to Bermuda through a shell in the Netherlands. The end result is that there is little connection between where the economic activity takes place and where the profits are booked.

Some executives argue that tax avoidance is a mere symptom, the real disease being the high corporate tax rates and complex rules imposed by rich countries. Others point out that they are big employers and contribute a lot in payroll taxes.

The system has become so complex that a completely new approach is needed. One intriguing proposal, unitary taxation, would aim to tax activities where they actually occur, not where some tax adviser has shifted them. The company would produce a single set of accounts and its worldwide profits would then be apportioned using a formula that takes in assets, sales and other measures in each jurisdiction. This is already being used in some federal systems, including a majority of American states. Unitary taxation comes with its own challenges, however. Agreeing on where exactly business takes place in a world of services and intangible assets is tricky.
When will be rich a fair international agreement in order to "avoid" "tax avoidance" by multinational corporations?


From
The Economist, Feb 16th, 2013