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The Forum > Article Comments > Reforming transfer pricing with outdated ideas > Comments

Reforming transfer pricing with outdated ideas : Comments

By Jonathan J. Ariel, published 30/5/2012

Do multinationals pay their fair share of tax?

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And still they chase the elusive profit to tax.
Here is a wee poem about Profit extracted with permission from The Versed Writing of Jock McPoet <>
Necessity is deemed to be, the mother of Invention.
Profit, viewed expectantly, is father to Intention.
Profit as a concept is not often understood
It’s a fundamental factor, and particularly good.
Both the Buyer and the Seller in a voluntary trade
Can both Profit by transacting, irrespective of who’s paid.
And the reason that we trade is to improve our little lot
And our Profit is our measure of our gain right on the spot
It’s that moment of decision when the value that we place
On the asset that we’re trading is unique in time and space
Tomorrow we might value what we traded with regret
Our Profit changes daily with each ‘what-if’ mood we get.
We might have sold our labour for a cheque or cash in hand
Or we may have bought a building on a decent block of land
But our cash may be devalued or our property rezoned,
Other people’s values too, affect all that we’ve owned.
Still we Profit by our actions and we Profit by our schemes
And our Profit is accountable in cash, in kind and dreams.
It only all gets murky and a bitter poison pill
When the penalty for Profit is a bloody great tax bill
But Taxation is the culprit when it takes too large a share
For it makes the cost of Honesty a mite too much to bear.
With stakes so high, our finest brains now turn from wealth creation
To concentrate their efforts on complex manipulation
Aimed at minimising ‘income’ that is subject to the plunder
Of the hordes of tax inspectors now who push, and pry, and wonder.
That is why it seems to me a logical conclusion
Taxing Profit always leads, down pathways of confusion.
Jock McPoet 1995
Posted by John McRobert, Wednesday, 30 May 2012 10:03:13 AM
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The entire concept of transfer pricing relies upon the ability to identify where and when a transaction takes place.

For physical goods, this is sometimes relatively easy to pin down: Dick Smith sells electronic gadgetry that he brought in from Taiwan. The "transfer price" is the invoice paid to the manufacturer.

This is at the heart of the "arms length transaction", where both the manufacturer and the retailer are owned by the same multinational business. "Fairness" is achieved when the transfer price roughly equates to the amount of a notional invoice between two unrelated companies.

It gets more complicated with services. If I do some consulting work in Botswana, and my Botswana subsidiary charges out at my normal rate, how would a "fair" price be calculated locally to declare as income? Because, sure as eggs, I am going to want the bulk of that fee remitted to head office back here in Australia. Whereas the Botswana taxman would feel that a remittance of, say, 95% of the invoice price sets the transfer price far too high.

More complex yet is anything to do with the internet. How does one "ensure that appropriate taxes are paid in the jurisdictions where revenues are generated", when there is no physical action that identifies the point of sale. The money may come out of my bank account here in Sydney, and be recorded as revenue in Dublin. But what if there is no requirement by that multinational for any of that revenue to be repatriated to Australia, giving an effective "transfer price" of 100%? Yes there may be a subsidiary here - but there is no physical need for that to be the case; the transaction could have been accomplished anywhere. Including Botswana.

We appear to not only have an outdated idea of how the problem can be solved, but an outdated idea of the problem itself.
Posted by Pericles, Wednesday, 30 May 2012 2:42:15 PM
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