Summary report on the transfer pricing seminar held in Helsinki on 13-14 June 2012
Transfer
Pricing: Alternative Methods of Taxation
of Multinationals
Seminar
held at the Parliament of Finland, Helsinki, June 13-14, 2012
Rapporteur’s Summary
Emanuel Rasche
Preceding remarks
This report on the seminar “Transfer Pricing: Alternative
Methods of Taxation of Multinationals”, hosted by the
Ministry of Foreign Affairs of Finland, Tax Justice Network and KEPA, provides
a broad overview of the matters discussed and restricts itself to exploring
overall lines of reasoning discussed during the seminar and indicating how to
proceed in its aftermath. It does not provide a detailed statement of the
technical discussions within the course of the seminar. For the sake of brevity, the summary is selective
in choosing what matters to report on, and readers are advised to consult the powerpoint
presentations and papers provided by speakers at the seminar, available here.
Day 1
In his opening remark TJN’s director, John Christensen,
stressed the overall objective of the seminar to highlight persistent and systemic problems arising from attempts to tax multinational companies (MNCs)
under the transfer pricing guidelines promoted by the Organization for Economic
Cooperation and Development (OECD). MNCs
continue to shift their profits to tax havens, while accounting for the costs
of production and services in countries with moderate and high tax rates.
Christensen specified that the aim of the seminar was to discuss the problems arising
from, and alternatives to, the current guidelines, and noted that the seminar
brought together a wide range of expertise, including theoretical thinkers as
well as practitioners from across the world.
In his welcoming remarks, Finnish Minister of Foreign
Affairs, Erkki Tuomioja expressed the commitment of the Finish government to
tackling tax avoidance, promoting more cooperation of jurisdictions by
mechanisms such as Automatic Information Exchange, and its efforts to promote
adoption of a Financial Transaction Tax. He noted the differing views with
respect to the current transfer pricing regime and expressed that the Finnish
Government did not expect a unanimous consensus from the conference, but expected
the seminar to provide a space for constructive dialogue on this important subject.
He also stressed the willingness of his Ministry to further cooperate with TJN
and related civil society organisations.
Heidi Hautala, the Finnish Minister for International
Development, noted that discussion on international development is steadily
moving beyond aid to making tax a major point of interest. The Minister
stressed the common problems of developing and developed countries in this respect,
in dealing with the extractive industries for instance, and she acknowledged
the willingness of the Finnish Government to support governments of developing
countries that seek to achieve more transparency and democratic control of land
and resources.
Tatiana Falcao outlined the Brazilian transfer pricing
system as a possible alternative to the OECD guidelines. She stressed the workability
of the Brazilian approach, which relies on a fixed mathematical formula based
on the MNCs own data. The system could reduce the excessive administrative
burden that developing countries incur when trying to apply the OECD’s
guidelines. The Brazilian system also provides juridical certainty for government
and taxpayers. Tatiana emphasised how
the Brazilian system gives priority to tackling tax avoidance, particularly in
situations involving the use by MNCs of tax havens, which she referred to as “Privileged
Tax Regimes”, even if they are not directly linked to Brazilian entities.
In the following contributions by practitioners from
various countries, a pattern of problems with the current transfer pricing regime
became unmistakably clear. Presentations
by Zhang Ying from the State Tax Administration of China, Anita Kapur from the
Ministry of Finance in India, Julius Bamidele from the Nigerian Federal Inland
Revenue Service, and Gertrude van der Westhuysen from the South African Revenue
Service, drew attention to the problems arising from attempts to apply the
OECD’s arm’s length method of transfer pricing in situations where accurate and
timely pricing comparables from non-related parties cannot be obtained or do
not exist. The general lack of suitable comparables and databases to
successfully apply the arm’s length method was also stressed by Indian tax
practitioner Vikram Vijayaraghaven, who posed the simple question: Comparables:
Whither Art Thou?
Another topic that recurred throughout conference was
the growing challenge posed by intangible trading within MNCs. In cases of
intangible trading it is evident that suitable comparables are typically
entirely missing, enabling huge profits shifting from source countries to tax
havens.
Chennai-based Vijayaraghaven expressed concerns about protracted litigation processes arising from
transfer pricing controversies in India. He concluded that the transfer pricing
regime requires “a sea change” and proposed sector wide safe harbours and
formulary apportionment as possible solutions.
James Henry, Senior
Adviser to TJN, provided empirical insights into the “Quantification of
Transfer Pricing Issues”. He noted that estimates of the harm caused by transfer
mispricing range between US$100-150 billion annually. He requested that priority
be given to further empirical research to disaggregate the data provided by
corporations to better understand their value chains. He also proposed undertaking
country specific studies.
In his contribution on
“Tax-Administration in Sub-Saharan Countries”, Joseph Guttentag, former senior
adviser to the OECD’s Committee on Fiscal Affairs, stated that the OECD’s arm’s
length method could be applied successfully by developing country governments
and rejected the idea that other mechanisms, such as unitary taxation with
formulary apportionment could function on a global level. He did, however,
propose a long list of measures that could be adopted by Sub-Saharan-Countries to
improve the use of the OECD’s arm’s length method. Most importantly he stressed
the need for more transparency and the disclosure of information by MNCs. He
further suggested making use of hybrid methods, such as the Profit Split Method,
which is de facto based on a
formulary approach, to overcome the difficulties confronting Sub-Saharan-Countries.
Case studies presented by Martin Hearson and
Felicity Lawrence illustrated how MNCs create complex legal structures to shift
profits to tax havens. Despite their elaborate codes of conduct on social
responsibility, paying tax is not widely seen as a sustainability criterion under
existing MNC codes of conduct. It became clear that tax compliance by MNCs
requires constant monitoring by civil society.
In their session, JuanCarlos Campuzano, from the Tax Administration of Ecuador, Ricardo Barrientos,
from the Central American Institute of Fiscal Affairs and Gonzalo Arias, from
the Inter American Centre of Tax Administration, raised the need for a
practical approach to tackling transfer mispricing in South American Countries.
They stressed that developing countries suffer from a lack of expertise and sufficient
funds to make the arm’s length method practicable in their countries. They also
noted the problem of “revolving doors” involving skilled staff leaving tax
authorities for the private sector, while former employees of the private
sector enter the revenue authorities of governments: conflicts of interest
almost inevitably arise.
David McNair concluded
that the sheer complexity of the arm’s length method, combined with the absence
of timely and reliable comparator data, poses huge obstacles for developing
countries with limited technical resources to investigate transfer pricing
abuses. The situation cries out for
simplification.
Day 2
Opening the seminar’s second day, Marlies de Ruiter,
Head of the Tax Treaty, Transfer Pricing and Financial Transaction Division of
the OECD’s Centre for Tax Policy and Administration, reported on OECD efforts
to overcome the current problems and dissatisfaction with its guidelines from
various sides. She explained that the arm’s length method was initially
designed to establish a market-based level playing field between MNCs and local
companies. Discussants noted, however,
that the trend towards highly integrated MNC business models in recent decades
has led to a situation in which competition between MNCs and their locally
based competitors is distorted by the former’s ability to use subsidiaries
based in tax havens for profit shifting purposes. De Ruiter acknowledged that the
treatment of intangibles poses significant problems when trying to apply the
arm’s length method and outline the OECD’s efforts to build expertise,
especially in developing countries to cope with these challenges. De Ruiter
also referred to attempts by the OECD to simplify its guidelines.
TJN’s Richard Murphy explained that Country-by-Country Reporting was a concept that required
disclosure of financial accountancy for every single jurisdiction where a MNC
operates. He argued that the public has
a right to have access to this information due to the considerable privilege
offered to MNCs in form of limited liability. If the countries in which MNCs
operate are required to bear the risk of their failure, then the public similarly
has a right to receive full information and account for tax payments. Furthermore,
disclosure of this information would provide reliable and timely pricing
information for use in collating data for pricing comparables. Murphy argued that such information might partially
overcome the weakness of the arm’s length method, which is significantly
restricted by the absence of comparables.
Mike McIntyre
from Wayne State University (another senior adviser to TJN) outlined the US
system of taxing MNCs, which focuses on taxing the economic substance of their
activities in the different states where they operate. The US requirement for “Combined
Reporting”, McIntyre’s preferred term, treats MNCs as a single “unitary
business” (hence the term “unitary taxation”) which must file financial records
covering all the states in which it operates. The combined income of the MNC is
taxable according to an agreed formula, for instance based on payroll, property
and sales, which allocates a share of the taxable profits to each state in
which the MNC is present. McIntyre rebutted suggestions that this approach is
hard to apply in practice, and noted that there is no need for agreement on one
particular formula: varied formulae can be applied as appropriate to different
sectors of an economy.
Michael Durst highlighted the
central fallacy of the arm’s length method, namely that subsidiaries of MNCs
can be treated as though they are non-related parties. This assumption ignores
the economies that arise from the integration of a wide range of activities
within an MNC structure. He noted that a formulary system, based on taxing real
economic activity, should yield a reasonably clear measure of a company’s
taxable income. While there is no “ideal system”, the theoretical flawsinherent to the arm’s length method makes it less preferable to unitary
taxation using formulary apportionment.
Reuven Avi-Yonah proposed how improvements
could be made to the arm’s length method. He stressed that financial transactions and the use of debt
within MNCs must be reconsidered to make income shifting between related
entities more difficult. He stressed that the price for capital can be
determined with arm’s length tools under the current approach but the form of
capital investment was beyond its scope. He proposed “re-characterising”
related transactions within MNCs as long-term subordinated debt. Under this re-characterization,
MNC affiliates would be seen as paying high interest rates on a regular basis
and income shifting manipulation could therefore be reduced using the existing
arm’s length method.
Both Avi-Yonah and Ilan Benshalom
suggested that a way forward from the currently unworkable system might involve
a “hybrid system”, applying the arm’s length method where relevant comparables are
available and formulary arrangements where they are lacking, especially in
respect of intangible trade. Both argued that formulary apportionment processes
are often misunderstood and problems with applying these processes are
frequently exaggerated. Their key argument was that there is no “all-or-nothing
paradigm”: formulary apportionment can be used selectively to overcome the
obvious weaknesses of the arm’s length method.
Kerrie Sadiq deepened this line of pragmatic
reasoning by exploring possibilities to tax multinational banks according to
formulary arrangements. She noted mounting awareness of the problems related to
taxing Multinational Financial Institutions (MNFIs) under the OECD’s guidelines,
and suggested that MNFIs can be regarded as a unique subset of MNCs due to the
specific services they supply and their “integrated trading model”. Sadiq argued that formulary arrangements would
yield a substance-over-form approach, which would take account of MNFIs real
economic activities within specific jurisdictions and disregard their extensive
use of complex legal structures to shift profits to tax haven subsidiaries.
Moreover taxing MNFIs on the basis of real economic activity reflects internalisation
theory, which states that companies become multinational precisely because of
the benefits they can achieve by internalising costs; benefits which are not
taken account of in the arm’s length method. Sadiq suggested that a formulary approach
to taxing MNFIs would lead to enhanced certainty, improved tax compliance, reduced
complexity, and a reduction in the potential for double taxation and double
non-taxation. For these reasons she proposed that applying formulary
apportionment on a sectoral basis to MNFIs might provide a useful test for its
wider application.
Sol Picciotto reported on Europe’s Common Consolidated Corporate TaxBase (CCCTB), which attempts to establish a single set of rules for companies
operating within the European Union. The CCCTB exemplifies the EU’s approach to
tackling transfer mispricing by moving towards a formulary approach and,
Picciotto suggested, could serve as role model for other regions.
In the final session, chaired by Christensen, Nicholas Shaxson
remarked that a principal objective for the future was to bridge the gulf
between experts and people on the street by adopting a simplified language that
could convey the basic issues to ordinary persons. There is also a need to
build effective communications between practitioners and theoretical experts. Shaxson
also stressed the need for more empirical data on profit shifting and case
studies to illustrate how it is done.
One contributor stressed that the
current situation requires “sticking to problems and bringing proposals forward
rather than sticking to labels”, while another contributor remarked that TJN
should select a specific position and lobby for it. These apparently contradictory
remarks highlight two strands of reasoning that were notable throughout the
seminar: on the one hand the “all or nothing solutions” tending towards either
the arm’s length method or unitary taxation based on formulary apportionment,
and the more pragmatic proponents with a “problem-focus” tending towards hybrid
solutions on the other hand.
Emanuel Rasche
Helsinki,
June 2012
0 Comments:
Post a Comment
<< Home