McIntyre on combined reporting

As we recently noted, TJN is just launching a project on Transfer Pricing - one of the great (largely unprobed) issues of our age - and we are inviting other organisations to join us in our research. We have promised to issue a series of materials on this subject, and in this spirit this blog contains an impressive piece of work on the subject by law professor Michael J. McIntyre.

Published in 2004 in Tax Notes International, this is not for the faint-hearted - it's a long, technical piece of work - but it is clearly explained, unlike a lot of the gobbledygook that is out there.

The essence of the paper is this. Currently, the standard solution to the transfer pricing problem as presented loftily by the OECD - allowing multinational corporations to use an "arm's length principle" to decide how they account for the transactions between different parts of their companies - is unworkable, McIntyre argues. Instead, he argues for something else - Combined Reporting (to be more technically precise: "combined reporting with formulary apportionment.")

Currently, multinationals twist themselves into distorted forms in order to shift their income to the right mix of jurisdictions (notably tax havens) in order to cut their tax bills (and to achieve other ends). Combined reporting, McIntyre, notes, would do away with this:

"The objective of this method is to impose taxes on a portion of the income of a multinational enterprise without reference to the form of organization of that enterprise. As a result, multinational enterprises with the same total income generally are treated the same under this method."

The effects of such a change could be world-transforming.

Unfortunately, there is a lot of jargon out there on this subject. Some people talk about "unitary taxation (with formulary apportionment) instead of "combined reporting." There is also talk about setting up a Common Consolidated Corporation Tax Base (CCCTB) as a requirement for applying this kind of taxation. As McIntyre explains, this has already been done, and shown to work, in a few places. Amid all the jargon, this blogger feels that "combined reporting" may have the best chance of squeezing through into mainstream discourse - comments on this are welcome.

But don't be put off by the technical aspects of this: complexity is, after all, why the world's biggest companies and individuals, and their clever lawyers and accountants, have got away with so much abuse for so very long. Civil society in particular need to get up to speed on these issues of such central importance to the wealth and poverty of nations. These issues are not, when boiled down to their essence, that difficult to grasp.

We will be issuing a shorter, simpler explanation of transfer pricing shortly. We already have a few documents available giving some simple explanatory principles - this short Tax Research blog may be helpful in this respect - and if you want to see all the documents we currently have available, you can find these, and so much more, on our A-Z document archive.

And as our transfer pricing project progresses, we will be bringing you more as it emerges. Watch this space.