Goldman Sachs, tax shelters and Schrödinger's cat

The Naked Capitalism blog has written a short article on Goldman Sachs, which is about CDOs, but is extremely pertinent in the field of international tax. This is about Goldman's 'truthiness' on whether or not what Goldman was doing was legal.

"Goldman sees that securities regs operate in the world of Schrodinger’s cat, where legality is in an indeterminate state until someone takes the trouble to look. And that remains true of what happened during much of the crisis. Tom Adams and I have written long form of the abuses that took place in CDOs, including probable market manipulation, lack of arm’s length pricing, and collusion by CDO managers, and we have argued separately that CDOs were the driver of the toxic phase of the subprime bubble. But no one seems willing to go there because the forensic work looks to be too daunting."

That will look familiar to any tax inspector who has taken a transfer pricing case against a multinational to court. And it touches on a question that's often asked: is transfer mispricing illegal? To which the answer is: it is usually in a grey area - and you only finally find out which side a particular deal is on after a court ruling. And tax administrations, particularly in developing countries, find it especially daunting to take on multinationals and their armies of lawyers and accountants. Note, again, that comment

"no one seems willing to go there because the forensic work looks to be too daunting."

Indeed. This is a nice way of looking at the problem of transfer pricing: the Schrödinger's cat problem.

Note that this even includes the term 'arm's length pricing' - which we believe isn't entirely being talked about here in a tax context - but is central to the whole transfer pricing industry: a system that the OECD jealously guards and which urgently needs change - as we argue in detail here.