Multinational companies have many ways in which they can abuse the tax systems of the countries that seek to tax their profits. Transfer mispricing – which is the abuse of transfer pricing arrangements – is one of them
A transfer pricing arrangement occurs whenever two or more businesses (whether corporations or not) which are owned or controlled directly or indirectly by the same people trade with each other. The term transfer pricing is used because if the entities are owned in common they might not fix prices at a market rate but might instead fix them at a rate which achieves another purpose, such as tax avoidance. If a transfer price can be shown to be the same as the market price then it is acceptable for tax purposes. What are not acceptable for tax purposes are transfer prices that increase the cost or reduce the sales value in states which charge higher tax rates and increase the sales value or reduce the costs in states with lower tax rates.
The difficulty for many corporations at a time when over 50% of world trade is within rather than between corporations is that there is no market price for many of the goods or services they trade between their own subsidiaries. This situation arises because they are never sold to third parties. This gives rise to complex models in which attempts are made to allocate value to various stages within the supply chain within a company, which process is wide open to potential abuse. For this reason it is argued that such firms should be taxed on a unitary basis.
Tax us if you can, The Tax Justice Network, 2012. Written by Richard Murphy and John Christensen