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Transfer Pricing (Background (Global Financial Integrity in Washington…

- - - - AKA transfer pricing manipulation or abusive transfer pricing
      - A form of a more general phenomenon known as trade mispricing, which includes trade between unrelated or apparently unrelated parties – an example is re invoicing)
        
        Re invoicing - a method used by MNC when invoices and payments are being made in different currencies by different branches of the firm. the products produced in one country are invoiced in the currency of that country and then re-invoiced in the national currency of the receiving branch.
  - - - Suggestions have been made that this figure may be closer to 70 %
- - - - Combined reporting with formulary apportionment and unitary taxation
      - This would prioritize the economic substance of a multinational and its transactions, instead of prioritizing the legal form in which a multinational organises itself and its transactions
  - - - Each state can apply its own state income tax rate to whatever portion of the overall unit's income was apportioned to it
      - There are technical and political complexities involved in designing such an ‘apportionment’ formula, but with political will
        they are quite surmountable
    - - Path dependency
        
        The ‘arm’s-length’ approach is how the international The ‘arm’s-length’ approach is how the international tax system has emerged, and there will be great institutional resistance to change established practices
        
        The alternative of unitary taxation is not an all-or-nothing approach requiring everyone to adopt it at once
        
        It could be adopted by some states and not others, or hybrid versions between unitary taxation and the arm’s-length approach could be adopted as interim steps
      - Vested interests
        
        Because multinational corporations like having the leeway to manipulate transfer pricing, they have a strong interest in maintaining the status quo
      - Technical issues
        
        There are potentially important technical complexities in designing an appropriate formula, and more work needs to be done in this area
    - - A concept developed by TJN’s senior adviser Richard Murphy
      - Country-by-country reporting could serve as the accounting basis
        for formulary apportionment and unitary taxation
      - Country-by-country reporting would require each multinational corporation to provide the following information
        
        The name of each country in which it operates
        
        The names of all its subsidiaries and affiliates in each country in which it operates
        
        The performance of each subsidiary and affiliate in every country in which it operates, without exception
        
        The tax charge included in its accounts of each subsidiary and affiliate in each country in which it operates
        
        Details of the cost and net book value of its fixed assets located in each country in which it operates
        
        Details of its gross and net assets for each country in which it operates
      - Country-by-country reporting would also disclose if there was deliberate material mispricing of goods or services across international borders
- - - - This might, for example, help it record as much of its profit
        as possible in a tax haven with low or zero taxes
    - - It is unworkable in many if not most situations: a lot of multinational corporate tax avoidance happens for this reason