This is going to be the great issue of this century, in my opinion. As yet most people have not woken up to the power of global corporations and how they increasingly are “stateless.” They have no interest in the public good of any nation. They represent, and are accountable to no nation. Their owners are increasing a small, global, very, very wealthy elite who have a huge sense of entitlement, and are used to no descent in their affairs. Many of these corporations are bigger than many states. They will do anything to increase their profits. And I mean anything. Lie, cheat, bribe, blackmail, anything.

This is the new aristocracy, and they are just as arrogant and just as ruthless as all the others that have gone before. They increasingly own the political class of most countries. New Labour under Blair is a good example of their control of political parties.

OP: “For example, a company could have a marketing team based in the UK, intellectual property rights or trademarks based in Switzerland, and production facilities based in China.”

If you have production facilities in China, that is one of the few ways to extract your money.

Oh, crap. I agree with Sally. Still, I’d be a prick not to admit it: Sally, that was well put.

I reckon we might be entering the age of authoritarianism via IPR.

@3 Chaise Guevara: “Oh, crap. I agree with Sally.”

I appreciate that it is late and that you may be tired. You may wish to reflect.

Sally states: “Their owners are increasing a small, global, very, very wealthy elite who have a huge sense of entitlement, and are used to no descent (ed: dissent} in their affairs.”

Mars (as in Mars Bar) are freaky in that they are a privately, very privately, owned company. Possibly unique. News Corp, the Murdoch empire, trades shares. Most big companies trade shares and you may own a smidge of them as a pension or ISA holder.

When you comb your hair in the mirror tomorrow morning, is the reflection a global capitalist or just somebody trying to get on in the world?

Yet more BS from NEF….transfer pricing rules are remarkably strict, and any large firm will be audited. It’s simply not worth their while to play fast and loose with the laws.

Transfer pricing is legal – tax avoidance. Paying the minimum you are obliged to. It is very different form evasion.

It’s a pretty important distinction….by not smoking I am avoiding paying a tax….not evading it.

And before Tim W gets here – please please please do try to recall that only people can (in the end) pay taxes. Not companies.

Company taxes fall variously on customers, employees and owners.

The academic literature suggests that it is employees which pay the greater share.

Surely this should make sense even to Sally. Assuming anything does.
After all those *evil* bosses aren’t just going to sit there and take it, are they?!

Dear Lydia

You write:

“Multinationals can manipulate transfer prices by mispricing the products traded between subsidiaries, which thus facilitates the flow of capital between countries. For example, a company may overstate the price of a product being sold from a subsidiary in a high-tax country to a subsidiary in a low-tax country.”

What is the price by reference to which the transfer price used is a misprice or the transfer price used is an overstatement? You are assuming that there is a “benchmark price” or “true price” by reference to which a comparison can be made.

Management accountants and economists have a concept of price in such circumstances, based on economic theory, efficiency, utility etc. But even the management accountants and economists acknowledge that such a price is only a theoretical construct used for the purposes of the economic theory and reliance on the ruthless pursuit of “utility”.

Is such theory actually something upon which you wish to build your position? It might be considered odd to refer to and have to rely on capitalist economic theory as the only way a “true price” can be determined.

As you will know, the OECD and the tax codes of developed countries have to create the fiction of an “arms length price” in order to make transfer pricing legislation work and, I guess that it is generally accepted that the “arms length price” does not really exist, is subject to negotiation (a more sophisticated word than “horse-trading”), and is very loose around the edges and is ultimately based on the economic assumption of utility.

Possibly, rather than directing your attention to the “true price” and the failure of MNCs to use the “true price”, it might be of more interest to consider the importance of the “inclusive business” framework for multinationals and developing the framework within which (at present) value seeking multinationals can harness the skills and resources available to them and establish what might be called Ruggie compliant companies in the developing world. Atrribution of profit to those companies could then be based on the OECD guidelines being adopted by the developing countries. Of course there would be the issues associated with weak tax administrations in developing companies and even a measure of corruption, but such issues would still be there if country by country reporting is introduced.

What do you think?

Regards

Gregory

sally is right in so much as there is a small number of influential and rich companies (not generally individuals) who have wide influence. But as almost all these companies are in turn owned by shareholders or have some form of mutual arrangement, I am not convinced there is an oligarchy forming there.

I think the danger is rather the machine that state-sponsored capitalism (with its natural tendency to favour large existing and rich operations) tends to be – consuming competition and creating monopolies (Russia and China are good examples of the dangers here). But this is a matter of stopping the corporations controlling government decisions (and especially, of stopping going down the road the US has adopted whereby corporations are given legal personality).

So how the issue of tax avoidance/evasion relates to this I don’t know – since any money saved has to go somewhere, and that is either consumer, employee or shareholders/owners. This is simply a question of who controls the resources, and as such is at the root of the orignal right-left divide in the nineteenth (?) century – an old question expressed differently once more.

Hi Tyler,

You write: “transfer pricing rules are remarkably strict, and any large firm will be audited. It’s simply not worth their while to play fast and loose with the laws.”

I’m afraid this is not the case. For example, research by Sikka & Willmott in 2010 noted that within WorldCom: “The paying subsidiaries treated royalty charges as an expense that qualified for tax relief whilst the income in the hands of the receiving company attracted tax at a low rate. This transfer pricing arrangement may have saved the company between US$100 million and US$350 million in taxes.”

Many big-name global corporations, such as GlaxoSmithKline and Shell, have also been criticized by tax authorities and have had to make settlement payments.

It is very expensive for regulators to investigate transfer mispricing, and developing countries, in particular, do not have the resources or expertise to probe and thus curb abuse. Consequently, such fraud currently rarely comes to light because, in today’s world of opaque accountancy, we are reliant on whistleblowers, undercover reporters, or someone taking legal action against a firm (as was the case with WorldCom).

In 2009, even Forbes admitted that “intra-company pricing crosses the line from tax avoidance into outright tax evasion”.

Furthermore, this practice means that corporations do not need to incur the cost of relocating to a tax haven. Instead they simply set up a small idle subsidiary (a “shell company”) in a tax haven and subsequently abuse intra-firm trade.

To add insult to injury, many accounting firms openly advertise their expertise in such maneuvers. For example, Ernst & Young boast of “creative and practical solutions for . . . transfer pricing needs”. Many of the multinationals that engage in transfer mispricing also simultaneously claim to be firm believers in corporate social responsibility. This hypocrisy should not be borne.

Moreover, even if you believe the all transfer pricing is tax avoidance rather than tax evasion (which I don’t), tax avoidance still constitutes shirking one’s duty to contribute towards society. It may be legal, but it is highly immoral. You cannot draw parallels between not smoking and avoiding paying the vast majority of one’s tax bill – this is simply ridiculous. Besides, the government deliberately highly taxes smoking, to try to persuade the public to give up a habit that is bad for them. The government is not deliberately trying to encourage people to use transfer pricing! Multinationals are merely exploting opaque accountancy practices, to selfishly avoid making a social contribution.

The country by country reporting is simply Richard Murphy again. So clearly it’s nonsense.

for a start, it entirely ignores why multinationals exist in hte first place. As Ronald Coase pointed out, there has to be a reason why there are firms, why people don’t just potter along contracting everything. The answer being that sometimes (and not always) the form itself, the method of organisation, is what is adding value.

So it’s the very fact that a multinational is indeed a multinational which is adding value: a value which we cannot ascribe to its activities in any one place or jurisdiction. For it is the very fact that it is not a series of contracting parties which is adding value: therefore to view or treat them a series of contracting parties is a nonsense.

And if we’re going to have arguments about the economics of this I’ll go with Coase, who won the Nobel for pointing this out, over Ritchie.

How unfair of the various national authorities to allow international companies and entities to be stateless, so let regulate, by requiring under CE rules for example, that the stateless corporate bodies choose where to be headquartered and wherever that is to be, the actual national authority require a full and independent accounting audit by one of a local panel of fully independent Accountants (not a franchise or regional or international partnership but one or more suitably qualified individuals) located in the district chosen as their headquarters. And, what about the unregulated amounts of money pushed around the world – money transfers made by and charged for by the banking cartels – this charge upon the transferring bank client and receiving bank client, should be taxed immediately, even if the Basel cartel claimed its too difficult to do and unfair, as anyone can see it can be done SWIFT-ly.

“that the stateless corporate bodies choose where to be headquartered and wherever that is to be, the actual national authority require a full and independent accounting audit ”

Err. this already happens. All companies are domiciled somewhere and all jurisdictions require that companies are audtied (well, not quite, the BVI doesn’t require an audit but everyone else does).

“Oh, crap. I agree with Sally. Still, I’d be a prick not to admit it: Sally, that was well put.”

HA HA. That has not done anything for your credibility in the eyes of the trolls Chaise Guevara.

Of course there are many things govts could do, but as I say this new aristocracy owns the political class. Through funding of parties and control of the media. That is why they push for the free movement of capital, little or no regulation and the curtailing of Union power.

As for the capitalist claim that you can buy shares. Well ,yes technically you can but a few shares. But have you ever been to a shareholder meeting where the small shareholders try to change anything? The big owners and institutions just vote like a communist block.

Welcome to the new global Versailles.

sally,

Who are the big owners and institutions – normally they are companies that either invest people’s money (including pension funds etc) or maybe even mutuals. They tend to vote together true, but they vote for what seems the most likely option for growth and profits (it doesn’t always work out mind you…). There are very few, if any, individuals that rich who have substantial money tied up in multiple companies.

It might be significant that the only consistent member of the top of the list of Britain’s richest people is the Duke of Westminster, whose wealth is still in land, same as his noble ancestors (if his lineage is that old) 500 years ago. Most of the others actually have their wealth tied up in their own private businesses.

@14…..was the third baronet who married well.

In 1677 Grosvenor married; he was aged 21 and his wife, Mary Davies, was only 12.[1] She was the daughter of a scrivener (scribe) and had inherited land to the west of London. This was part of the Manor of Eia (or Ebury) and Mary’s portion consisted of “swampy meads” (or meadows).[1] The area was later to become the Mayfair, Park Lane and Belgravia areas of London, a prosperous part of the Grosvenor estate.

The Earldom was aquired by the 7th Baronet, the Marquessate by his son and the Dukedom then in the 1880s or so.

Purely chance they ended up owning that part of London. On the other hand, to be fair to them, they did develop it.

” Most of the others actually have their wealth tied up in their own private businesses.”

May be true, but I always thought putting all your eggs in one basket was financial suicide. Obviously a businessman is going to retain a significant stake in his own ventures (if only to convince others it is solvent) but I’m pretty certain most wealthy people have a large portfolio of investments, that way if one goes bust you don’t lose everything.

Planeshift,

Sorry – you’re correct. I should have said have their main business interests tied up in one business – if they are smart they have a diverse portfolio of other interests, but are unlikely to have particularly substantive holdings in single companies. Either way, I can’t think of any private individuals who have the range of holdings and clout of the financial companies (which is perhaps an argument in favour of the present system).

Tim W,

Thanks for the info – can we assume you are supplanting Burke’s Peerage now?

No, just that I know how to use Wikipedia…..

@17 Watchman: “Either way, I can’t think of any private individuals who have the range of holdings and clout of the financial companies (which is perhaps an argument in favour of the present system).”

Marc Andreesen, best known for the association with Mosaic and Netscape, has very wide influence: eBay, Twitter, Cisco, HP etc. But that range is very unusual for a single individual. My ability to identify one person does not undermine Watchman’s argument.

Hi Gregory,

I agree that establishing the “fair price” is a far from trivial task. However, many examples of transfer mispricing are really quite extreme. For example, research by Pak and Zdanowicz in 2002, revealed Trinidad-based subsidiaries of a multinational exporting pens for $8500 and importing prefabricated buildings for $1.20. Whilst these are, of course, extreme examples, a substantial percentage of transfer mispricing will be more moderate, yet still obviously suspect. Thus, I think the “arms length” approach is useful, despite it being a crude tool that will not identify more subtle abuses.

However, I agree that there additionally needs to be more widespread reform of the regulations governing multinationals. Unfortunately, I have yet to properly look into the “inclusive business” models you mentioned, so am unable to comment at present on this specific point.

Best wishes,

Lydia