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Session 6: Tax Considerations and Exchange Rates - Coggle Diagram
Session 6: Tax Considerations and Exchange Rates
Transfer Pricing
Happens whenever 2 companies that are part of the same multinational group trade with each other.
Not illegal but transfer mispricing is.
Arms-Length Principle
Two unrelated parties trade with each other, a market price for the transaction will generally result.
Arms-length's price is considered to be acceptable for tax purposes.
When two related companies trade, they may wish to distort the price of the trade to minimise tax bill.
Arms-length principle is supposed to stop this happening.
Unworkable in most situations, a lot of multinational corporate tax avoidance happens for this reason.
Developing couintries are most vulnerable to transfer mispricing.
Transfer Mispricing
Happens due to...
No market comparisons being available, so arms-length price is not obvious.
Great scope of uncertainty for misunderstanding and for deliberate mispricing.
Trade can be very ambiguous which encourages mispricing.
Results in...
Governments are hobbled in their ability to collect revenues from the tax system.
Billions of dollars are wasted on government enforcement efforts that have little chance of success.
Alternate Approaches: unitary taxation with profit apportionment.
Some favour combined reporting, with formulary apportionment and unitary taxation.
Favours economic substance of multinational and its transactions instead of legal form in which the MN organises itself.
Combats profit-shifting.
Unitary taxation involves calculating a companies total global profit and then apportioning the profit across countries using a formula (based on sales, employees and assets in each country) and then taxing each countries allocated share.
3 main obstacles
Path dependency - the 'arms-length' approach is how the traditional tax system emerged and there will be massive resistance to change it.
Vested interests - multinational corporations like being able to manipulate transfer pricing, they have strong interest in maintaining that power.
Technical Issues - important technical complexities in designing a formula that works.