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Reading 5: Transfer pricing (Transfer mispricing (Illegal & abusive,…
Reading 5: Transfer pricing
2 companies - same multinational group - trade with each other
Price established = transfer pricing
Transfer mispricing
Illegal & abusive
Trade mispricing
Trade between unrelated parties ie, reinvoicing
Approx 60% of international trade happens
within
multinationals
Loss of tax revenue
Arm's-length principle
Market price for transaction between 2 unrelated companies
Arm's length trading
Genuine negotiation
Tax acceptable
UNWORKABLE
Substantial resultant damage
Tax avoidance
Waste of enforcement efforts
Problem when 2
related
companies trade
Price manipulation to minimise tax
Record profit in tax haven
Low/zero taxes
Traditional Approaches
Arm's length principle
#
Endorsed by OECD & United National Tax Committee
Basis of bilateral treaties between governments
Difficulties
Patents, trademarks etc
Alternative Approaches
Unitary taxation with profit apportionment
Prioritise economic
substance
of multinational
Tax various parts of multinational based on what they are doing in the real world
Agreed formula
Payroll, third party sales etc
Technical & Political complexities
MAIN OBSTACLES
Vested interests
Multinationals
Technical issues
Path dependency
Institutional resistance
Financial reporting
Country-by-country