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Block 2, Session 6 - Tax considerations
and exchange rates (Transfer…
Block 2, Session 6 - Tax considerations
and exchange rates
What?
Explores the causes of why currencies are bought and sold in the currency markets, how governments intervene in currency markets, and why changes in exchange rates matter for businesses.
International tax rates - PriceWaterhouseCoopers (PwC) and the World Bank Group have collected data that is published annually in a publication entitled ‘Paying Taxes’. The data contains information on 190 economies around the world and provides the most comprehensive insight into how governments choose to tax companies operating in their jurisdictions and the mechanisms by which those taxes are levied
The role and impact that international tax rules have for organisations, as well as the relative balance between national and international tax regimes
This session has focused on the challenges of changing international tax rules and exchange rates for businesses. It has provided examples of international tax avoidance techniques of high-profile companies. While countries are allowed to set their own corporate tax rates, the international community has tightened up on base erosion and profit shifting (BEPS). Finally, the session has explored the foreign exchange market; the causes of why currencies are bought and sold in the currency markets; how governments intervene in the currency markets; and why changes in exchange rates matter for businesses.
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Transfer pricing
Happens whenever two companies that are part of the same multinational group trade with each other: when a US-based subsidiary of Coca-Cola, for example, buys something from a French-based subsidiary of Coca-Cola. When the parties establish a price for the transaction, this is transfer pricing.
Transfer pricing is not, in itself, illegal or necessarily abusive. What is illegal or abusive is transfer mispricing, also known as transfer pricing manipulation or abusive transfer pricing
It is estimated that about 60 percent of international trade happens within, rather than between, multinationals
Estimates vary as to how much tax revenue is lost by governments due to transfer mispricing. Global Financial Integrity in Washington estimates the amount at several hundred billion dollars.
Arm's length principle
If two unrelated companies trade with each other, a market price for the transaction will generally result. This is known as ‘arm’s-length’ trading, because it is the product of genuine negotiation in a market. This arm’s length price is usually considered to be acceptable for tax purposes.
The ‘arm’s-length’ principle is supposed to stop this by ensuring that the prices are recorded as if the trades were conducted at ‘arm’s length’. In practice, it is unworkable in many if not most situations: a lot of multinational corporate tax avoidance happens for this reason.
Many companies strive to use the arm’s-length principle faithfully. Many companies strive to move in exactly the opposite direction. In truth, however, the arm’s-length principle is very hard to implement, even with the best intentions.
The resulting damage from the prevalent ‘arm’s-length’ approach has been, and is, substantial. Governments around the world are systematically hobbled in their ability to collect revenues from the corporate tax system. Billions of dollars are wasted annually around the world on governmental enforcement efforts that have little chance of success, and on meeting expensive compliance requirements
But when two related companies trade with each other, they may wish to artificially distort the price at which the trade is recorded, to minimise the overall tax bill. This might, for example, help it record as much of its profit as possible in a tax haven with low or zero taxes.
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BEPS
Companies have become adept at using schemes to shift profits across borders to take advantage of tax rates that are lower than in the country where they made the profit. In October 2015, the Organisation for Economic Co-operation and Development (OECD) released its final version of an Action Plan to combat what is called ‘Base Erosion and Profit Shifting’ (BEPS).
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The 2008/09 Global Financial Crisis and resulting public austerity elevated international tax issues onto the global political agenda. International tax reporting moved from purely technical discussions to intense political interest and led to major agreements on issues across the international arena.
New reporting requirements:
- Country-by -country: Details on each entity, organised by country
- Master file: Standardised information for all group members
- Local file: Transaction details between local entities and affiliates
The OECD recognises that special rules designed exclusively for the digital economy would prove unworkable because the digital economy cannot be ring-fenced. There are no immediate recommendations beyond the application of value-added taxes. Ongoing work on taxation of the digital economy will continue, and another report will be produced by 2020.