Understanding "transfer pricing": how corporations dodge taxes through financial colonialism

Every day, the world's poorest countries lose $3b in tax revenues as multinationals sluice their profits through their national boundaries in order to avoid taxes in rich countries, and then sluice the money out again, purged of tax obligations thanks to their exploitation of tax loopholes in poor nations.

The secret to all this tax-dodging is a complex grift called "base erosion and profit shifting" (BEPS). Like many of the most important and dangerous things in the world, it's boring, complicated, and very important, and the reason it persists is that the boringness and complexity baffles and bores people so they stop paying attention to it, leaving it to chug along, despite its importance.

At its core, BEPS involves using bookkeeping fictions to transfer your profits to low-tax jurisdictions and your costs to high-tax jurisdictions. BEPS abuses "transfer pricing," which is the pricing of goods and service between multinational companies, by using prices of convenience for transactions within a single company's international divisions.

Here's how that works, in a real-world example detailed in an IRS lawsuit against Amazon, which is one of the world leaders in BEPS tax-avoidance. Amazon transfered all its "intellectual property" assets to a company called Amazon Lux, in Luxembourg, where taxes are very low. Then, every time Amazon's other divisions make a profit, they send that profit to Amazon Lux, which sends them an invoice for their use of Amazon's trademarks, software, etc. That way, Amazon's other divisions break even (or even lose money, if that makes them eligible for a tax-credit on the loss), and Amazon Lux makes all the company's profits in a tax-free jurisdiction (Luxembourg).

Variations on this scheme use other jurisdictions (the Netherlands, Switzerland) and other intangibles to quote on in the bogus invoices ("management services" as an alternative to "intellectual property").

But things get really sweaty once the countries involved are poor ones whose political, regulatory and judicial systems can be suborned at low expense: in the "Mauritius Manoeuvre," an individual or company can arrange to book all its profits on Mauritius at no tax, then bring the money back to a rich country as "dividends from foreign investment," again, at low- or no tax.

Often these laundry maneuvers through poor countries involve assets whose valuation-swings are massive: a company can mine 2 million tons of cobalt in Papua New Guinea and export it at $5/ton to Mauritius, then export it again to Canada at $10/ton -- not only does this help them disguise their profits in Canada, it also helps them dodge taxes in desperately poor Papua New Guinea, where the real value of the cobalt ($10m) is booked as $5m, despite PNG's already-low tax rate of 5%, meaning that PNG loses out on $250k, which they can't afford to lose.

Much of this sort of shenanigan is documented in the Paradise Papers and the Panama Papers -- indeed, the whistleblower who leaked the Panama Papers said they were motivated by the "metastasizing" of offshore shell companies used for tax evasion (the Panama Papers detail the finances of 214,000 offshore shell companies).

The impact of trade and transfer mispricing on developing countries is not just monetary. There are a series of moral effects as well. In the hypothetical PNG scenario, for instance, one glaring concern that arises from this manipulative business practice is the implication that the people of PNG are somehow unaware of the value of their own resources. A red flag must be raised to the psychological impact of pricing discrepancies that suggest cobalt, somehow, has a lesser value within the borders of PNG than within, say, Canada or Belgium.

Trade and transfer (mis)pricing are symptoms of an ongoing colonial hangover. Given that transfer (mis)pricing is at the centre of operations of MNEs, then the only way to remove this jewel in the crown of every MNE is to dismantle the multinational enterprise as it exists today. A first necessary step would be to introduce strict and enforceable regulations that help guide us away from such damaging relations of production.

Transfer (mis)pricing, the jewel in every multinational enterprise’s crown [Tanya Rawal-Jindia/Opendemocracy]

(via Naked Capitalism)

(Image: Official Magic, CC-BY, modified)