Transfer pricing and developing countries - new report

The European Commission has just published a new study entitled Transfer Pricing and Developing Countries, which looks particularly at the application of rules with respect to Ghana, Honduras, Kenya and Vietnam.

We have not yet parsed this report in any detail - but we will. From the outset we are discouraged by two things in particular. The first appears on the very first page (and in the top right of every subsequent page), and the accompanying picture shows it:

That should be a red flag, straight away. There is a battle growing in the field of transfer pricing, especially with respect to developing countries. In one camp sit developing countries - which, as David McNair of Christian Aid recently pointed out,

"have little hope against TNCs' armies of tax lawyers and accountants."

In the other corner sit the OECD, a club of rich countries, which jealously guards and promotes the rules it has set up - rules that are favourable both to rich countries and to their multinationals, often to the detriment of developing countries. PWC sits firmly - and aggressively - on the side of the OECD and multinationals: current transfer pricing rules not only feed tax haven business but also generate staggering complexity - so multinationals turn to the Big Four accountants to sort out their tax affairs. The OECD rules mean billions in fees for the likes of PWC.

The Tax Justice Network, along with many other experts, say that these rules do not, and cannot work effectively, particularly for developing countries. (See this, for example, by top U.S. transfer pricing expert Michael Durst, or a range of other stories on our transfer pricing page.)

This is not to say that all multinationals necessarily support the OECD system at all costs. Indeed, there is evidence that some would welcome real reform, and that their priority isn't merely to hack away at their taxes as far as possible - as this blog highights.

The Tax Justice Network advocates wholesale reform of global transfer pricing rules, which could potentially help developing countries a great deal. Reform that merely tinkers with, or enhances, current OECD rules, are not good enough.

So does the EC report reflect a balanced view, advocating real reform that would really go towards helping developing countries? Well, the overview of the PWC-implemented report summarises that the report:

"recommends suitable approaches for supporting developing countries in the adoption and implementation of transfer pricing rules in line with international standards."

Which puts it firmly in the OECD / Big Four camp. Tinker with the existing rules, it is saying, but keep the existing rules in place. And then there is the report itself, which adds:

"A number of international organisations have put the issue of TP [Transfer Pricing] in developing countries high on their agendas. The OECD Guidelines could serve as common global standards for TP and we would advocate that developing countries orient themselves to these standards when adopting and implementing TP legislation."

That makes it crystal clear. 'Don't change the system. We like it. Just help countries implement them.'

This looks like the fox being consulted on henhouse security.

As we said, we haven't parsed the report in all its glorious detail yet, but so far it doesn't look good. More from this battleground here.

Although the Big Four are probably beyond redemption in this battle, there is the potential for progressive thinking among multinational corporations - as this welcome recent quote from the head of GlaxoSmithKline suggests - it is, he said,

"completely wrong" for businesses to view themselves as "mid-Atlantic floating entities" with no connection to society.

Quite so. And refreshing to see.

Update: Tax Research UK has covered this blog - and added this:

a) PWC are emphatically opposed to country-by-country reporting which has greatest prospect of providing developing countries with the risk assessment data they need to determine which transfer pricing cases to pick. You can’t promote good transfer pricing practice and oppose the availability of data to make it possible.

b) PWC act for the corporates doing much of the abuse.

c) PWC are found in all the world’s major tax havens – where much of the ill gotten gains of abuse are likely to be stashed.

To put it another way – PWC are completely conflicted on this issue meaning anything they write lacks any objective credibility.