How Multinationals Pad Their Budgets with the Wealth of Developing

INTERNATIONAL How multinationals pad their budgets with the wealth of developing countries Tax havens are a geopolitical nightmare, and transfer pricing is a legal accounting trick to get money into tax havens, writes *Tanya Rawal-Jindia. mazon.com Inc. was brought to justment would have increased Amazon’s the 100,000 residents from lead poison- court by the US Internal Rev- federal tax payments by more than $1 ing 18 times over. enue Service (IRS) in 2017 for billion. Even for the U.S., a country with Water supply is not the only in- transferA pricing discrepancies. In 2005 decent (although waning) infrastructure, frastructural problem that arises when and 2006, the multinational tech com- the loss of this much cash in federal tax export countries suffer from a dramatic pany transferred $255 million in royal- revenue is substantial. Take for instance loss of tax revenue. Education, hospitals, ty payments to its tax haven in Luxem- the water crisis in Flint, Michigan — if telecommunications, and roads also de- bourg, but according to the IRS these the city’s estimated costs of $55 million cline. And in developing countries — royalty payments should have amounted to replace the pipes are accurate, then the countries that endure the most severe to $3.5 billion. This transfer pricing ad- Amazon’s tax payments could have saved backlashes of transfer and trade mispric- 28 African Agenda Vol. 22 No. 3 INTERNATIONAL African workers in a Chinese clothing factory ing — this infrastructure is often never rich and poor, of the resources they need In other cases, the incentive for misin- properly constructed in the first place. to provide vital public services and tackle voicing is to claim tax incentives or avoid The much-needed cash is, instead, sitting rising inequality.” paying duty. Generally, the scheme is in a tax haven. Tax havens are a geopolitical night- this: shift profits out of high tax coun- The anonymous whistleblower who, mare, and transfer pricing is a legal ac- tries and into low tax countries, or tax in 2015, leaked the 11.5 million docu- counting trick to get money into tax ha- havens, while ensuring that the majority ments that we now know as the “Panama vens. of the expenses are assigned to high tax Papers” shared in a manifesto that “in- countries. come inequality” was their motivation Transfer mispricing, defined In 2015, Global Financial Integrity in revealing the levels of financial abuse There’s a wide range of these kinds (GFI) published a study revealing that that tax havens create. A key concern for of tax avoidance games played by mul- in 2013 an astounding $1.1 trillion was the whistleblower is that tax havens are tinationals: Transfer mispricing, abusive stolen annually — or nearly $3 billion a “metastasizing” across the earth’s surface transfer pricing, trade misinvoicing, base day — from developing countries due — 214,000 offshore entities are cited in erosion and profit shifting (BEPS), and to trade mispricing. If you wonder why the Panama Papers. The “metastasizing” re-invoicing — they all fall under the developing countries seem rather slow to certainly continued after the release of umbrella of trade mispricing, or the in- develop, here’s a big part of the answer. the Panama Papers — just two years lat- tentional falsification of transactions on The head-spinning loss of $3 billion a er, a US PIRG (Public Interest Research an international level, and are the process day in taxable revenue begs the question: Group) study found that 73% of the that has allowed the old colonial rela- is “corporate practice” simply legal thiev- Fortune 500 companies operated 9,755 tions of productions to continue. Argu- ery? tax haven subsidiaries. The problem of ably, the polynymity of this deceptive tax havens did not form overnight; in practice is evidence of its ubiquity, but Depleting the tax base, fact, the whistleblower echoes Raymond “thievery” could just as well replace any C. Offenheiser, the former president of of these titles. perpetuating poverty Oxfam America, in his 2006 description The short-term goals for mis- or Transfer pricing — the pricing of of tax havens as being “the core of a glob- re-invoicing vary. In some cases the de- commodities traded between or within al system that allows large corporations sired outcome is to dodge capital controls multinational enterprises — is a legal and wealthy individuals to avoid paying (a strategy commonly used in emerging practice and a key feature of cross-border their fair share, depriving governments, markets to reduce rapid cash outflows). and intra-firm transactions. The United Vol. 22 No. 3 African Agenda 29 INTERNATIONAL Nations prefers to use the broader phrase effective tax rate was viewed as being The Colonial undertones of transfer “trade pricing” in addressing this practice “too low” as it would impede, locally, pricing and defines it as a “normal incident of the “fair competition” for corporations func- It is not the case that some industries operations of multinational enterprises tioning only in those domestic markets. are more prone than others to transfer (MNEs).” Because the word “incident” With this latter motivation, little prom- mispricing, or even that developed coun- evokes concern, it should not go unno- ise ought to be expected from the plan as tries are immune to this manipulative ticed. One of the most disruptive conse- it maintains a focus on risks brought to business practice — the IRS case against quences of transfer pricing is that inter- MNEs. Amazon is a great example of this. But, it national transactions are now governed Setting potential reputation risks is the case that developing countries are by the common interests of the “associ- aside, the incentive for companies to more vulnerable to the impact of transfer ated enterprises” of an MNE group. That strategically misprice trade or shift their mispricing. Suppose a company extracts is, market forces no longer control the profits is to avoid tax or duty payments. 2 megatons (MT) of cobalt from Papua transactions because with the allowance The incentive is to shield wealth. And New Guinea (PNG) and then exports of transfer pricing, an increasing percent- while there is no single way to avoid tax the 2 MT (or 1 million kilograms) at the age of global trade (this includes the in- payments and dues, there is one neces- price of $5 per kilogram, but imports sary component: tax haven subsidiaries. ternational transfer of goods and services, into Canada — by way of Mauritius or the Netherlands — the same 2 MT capital, and intangible goods, or intellec- The art of creating political asylum tual property) now occurs as an internal of cobalt at the price of $10. The result networks for wealth practice between affiliated entities. for PNG is the loss of tax revenue on $5 Tax haven subsidiaries function as Theoretically, internal transfer pric- million. Even at a mere 5% tax rate with cash canals to transport taxable profits these modest and imaginative figures, a ing is supposed to follow the arm’s length with the goal of lowering or, if you are loss of $250,000 for PNG is significant. principle. This principle follows the idea Amazon Inc., entirely avoiding tax pay- The impact of trade and transfer that transfer prices should be controlled ments. But a company’s subsidiary in a mispricing on developing countries is and recorded as if internal trades were tax haven requires financial sleights of not just monetary. There is a series of happening amongst independent enti- hand to get the cash safe. Take for in- moral effects as well. In the hypothetical ties, or at “arm’s length.” But like the IRS stance the Goldcrest method Amazon PNG scenario, for instance, one glaring case against Amazon.com reveals, prov- used in Luxembourg. It shifted its intel- concern that arises from this manipula- ing arm’s length is not so straightforward. lectual property rights (or intangibles) tive business practice is the implication So while the “arm’s length principle” is that were held by its US parent company that the people of PNG are somehow un- very much written into place (Brazil is to its subsidiary, Amazon Lux. The sub- aware of the value of their own resources. listed as the only country without domes- sidiary then collected royalties tax-free Trade mispricing, then, alienates tic legislation or regulation that makes on international sales. Google and Ikea, people from their own place, and in a reference to the arm’s length principle), similarly, decided to play the “Going manner similar to a worker’s alienation even research from the Organization for Dutch” move, using their subsidiaries in from their product. A red flag must be Economic Cooperation and Develop- the Netherlands. raised to the psychological impact of ment (OECD) and the United Nations The “Swiss Sidestep” is another tax pricing discrepancies that suggest cobalt, recognize that this principle is very much play, and rather than royalty payments, somehow, has a lesser value within the impossible to implement. “management service fees” are the key el- borders of PNG than within, say, Canada Unable to ignore the ease with ement. By paying a value-added service or Belgium. which a company could engage in abu- fee to a sister company in a European The combination, or the intersec- sive transfer pricing, the OECD and the tax haven, a company can “side-step” tax tion, of these two matters — these mone- G20 countries first drafted the “BEPS payments by converting profits into fees. tary and moral effects — is evidence that Action Plan” in 2013 as part of a broad- And, then, of course, there is the priva- trade and transfer (mis)pricing, the crux er effort to enhance transparency for tax cy and protection that a company gets of an MNE — are symptoms of an ongo- administrations to assess transfer pricing.

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