In researching my next series of articles, I've just come across a great article on transfer pricing published by the formidable Tax Justice Network. I am very impressed with the work they are doing.
The article explains how multinational companies avoid paying taxes by mispricing the goods and services they transfer to and from their subsidiaries in other countries. There are regulations against this, but as the article points out, enforcing these regulations is very difficult and expensive.
One of the chief difficulties is that the regulations typically try to assess the "arm's length" value of a transaction. In other words, is the transfer priced by the company at a value that unrelated parties would think is fair. The principle is fine, but in practice it runs into difficulties.
For instance, how do you establish the fair value of someone's brand. How much should Apple be allowed to charge its foreign subsidiaries for using the Apple logo?
And what about highly specific products and services? If the subsidiary and the parent company are the only companies in the world to buy and sell a proprietary component that goes into one of the corporation's products, how can regulators establish the fair market value of the component? To make things even more difficult, the component could be something as hard to pin down as an algorithm or a software routine.
These fundamental regulatory difficulties allow corporations to artificially transfer profits from one country with high tax rates to another country with lower tax rates, avoiding taxes.
The impact on nations in the Global South is particularly severe. I love this particular article for its use of the phrase "pinstripe infrastructure." The accounting profession has a long history of enabling questionable, immoral and even illegal business practices. None of the large-scale tax dodging and financial fraud we see in the corporate world would be possible without the active participation of accountants.
For further reading, download this article by my esteemed colleague, Prem Sikka.
Inadvertent photo of my pant leg taken in a very bumpy car ride in Dhaka in 2014.