Some companies dodge paying tax through ‘transfer pricing’. Christian Aid has estimated this costs developing countries at least $160 billion in lost revenue a year, more than they collectively get in aid!
Transfer pricing is when goods and services are sold between subsidiaries of the same parent company. These goods and services include things like intellectual property rights, management services, branding and insurance. The sales take place within the same multinational company.
As long as the subsidiaries of the company charge each other a fair market price – known as an ‘arms length’ price – such transactions are perfectly legitimate. Tax is paid where it should be, in the place where the business is actually taking place. However, by artificially altering the price, the company can increase its costs in a location with high taxes and transfer revenue to a location with low taxes (often a tax haven). This is known as ‘transfer mispricing’, and in many countries (including Australia) it is illegal.
With 60% of world trade now taking place within, rather than between, multinational corporations, there are substantial opportunities to manipulate transactions to reduce tax.
This is especially the case for things like brands and management services. To detect if a company is distorting the price of a particular good you can compare it with the normal price of the good traded between two unrelated companies. But when it comes to things like branding rights and management services it is much harder to determine if the price being charged is a ‘fair’ price.
It’s been calculated that Australia lost 1.1 billion euros through transfer mispricing to the EU between 2005 – 2007 and US$1.5 billion in tax revenue through transfer mispricing to the US in the same period. For developing countries the losses in revenue from transfer mispricing are much, much worse.
For details, read the full report from Christian Aid here.
What you can do Email the Treasurer Wayne Swan MP. Thank him for hisrecent public comments about the need to crack down on tax dodging by multinational companies. Ask him to ensure Australia’s tax laws are tightened to stop multinational companies dodging their fair share of tax. Also ask him to support the development of effective international tax rules so that developing countries are not cheated out of their fair share of tax revenue.