The Evil Of Transfer Pricing
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The Evil Of Transfer Pricing

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The Evil Of Transfer Pricing

The Evil Of Transfer Pricing

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The Evil Of Transfer Pricing Presentation Transcript

  • 1. * “Running an Agile Fortune 500 Company” Aditya Yadav, aditya.yadav@gmail.com in.linkedin.com/in/adityayadav76
  • 2. * A Typical Global Company * Fortune 500/1000 * 200 Divisions * 40 Countries * 25000 Employees *
  • 3. * @ Acme Inc.
  • 4. * Original Question “We need to hire a Director of Transfer Pricing…” * The Correct Question - “You need to understand the downside impact of incorrect transfer pricing. It can kill a company. Its not just about saving taxes.” *
  • 5. * And The Philosophy Behind The Answer
  • 6. * * * Transfer Pricing is a fundamental principle used in assigning value and revenue attribution to the various business units. Essentially, transfer pricing in banking is the method of assigning the interest rate risk of the bank to the various funding sources and uses of the enterprise. Thus, the bank's corporate treasury department will assign funding charges to the business units for their use of the bank's resources when they make loans to clients. The treasury department will also assign funding credit to business units who bring in deposits (resources) to the bank. Although the funds transfer pricing process is primarily applicable to the loans and deposits of the various banking units, this proactive is applied to all assets and liabilities of the business segment. Once transfer pricing is applied and any other management accounting entries or adjustments are posted to the ledger (which are usually memo accounts and are not included in the legal entity results), the business units are able to produce segment financial results which are used by both internal and external users to evaluate performance. *
  • 7. * Formulary apportionment is a method of allocating profit earned (or loss incurred) by a corporation or corporate group to a particular tax jurisdiction in which the corporation or group has a taxable presence. * It is an alternative to separate entity accounting, under which a branch or subsidiary within the jurisdiction is accounted for as a separate entity, requiring prices for transactions with other parts of the corporation or group to be assigned according to the arm's length standard commonly used in transfer pricing. * In contrast, formulary apportionment attributes the corporation's total worldwide profit (or loss) to each jurisdiction, based on factors such as the proportion of sales, assets or payroll in that jurisdiction. *
  • 8. * * * * The Arms Length Principle The Organization for Economic Co-operation and Development (OECD) has adopted the principle in Article 9 of the OECD Model Tax Convention, to ensure that transfer prices between companies of multinational enterprises are established on a market value basis. In this context, the principle means that prices should be the same as they would have been, had the parties to the transaction not been related to each other. This is often seen as being aimed at preventing profits being systematically deviated to lowest tax countries, although most countries are also concerned about prices that fail to meet the arm's length test due to inattention rather than by design and that shifts profits to any other country (whether it has low or high tax rates). It provides the legal framework for governments to have their fair share of taxes, and for enterprises to avoid double taxation on their profits. A simple example of not at arm's length is the sale of real property from parents to children. The parents might wish to sell the property to their children at a price below market value, but such a transaction might later be classified by a court as a gift rather than a bona fide sale, which could have tax and other legal consequences. To avoid such a classification, the parties need to show that the transaction was conducted no differently than it would have been for an arbitrary third party. This can be done, for example, by hiring a disinterested third party such as an appraiser or broker, who can offer a professional opinion that the sale price is appropriate and reflects the true value of the property. *
  • 9. * Governments will try to maximize the Tax in their Local Jurisdiction (ref: Arms Length) * Firms will try to move Allocations to the country with the lowest tax amongst all the countries it does business in * We will be looking at the problem from Multiple Perspectives (i) The Firm and (ii) The Government *
  • 10. * The problem is * Σ mpi >> MPend-product * i.e. Sum of all Fair market prices of all inputs put together is grossly greater than the Fair market price of the End Product * The arm’s length principle has Gross Deficiencies and renders Firms uncompetitive *
  • 11. * * * Step 1) It is in an organizations best interest to use pure Cost’s upstream and book all profits at the Country(s) of Sale. Each Org. will have multiple country’s of sale. This allows the most efficient and competitive delivery of Value and Pricing Step 2) Do one of the following * * * For each country of sale allocate its profit to the country with the lowest tax in the chain Or else use a Formulary approach to allocate actual profits in the chain e.g. proportion of Costs is a good measure to allocate profits in proportion… The Biggest Question To Ask: Why do governments tax Firms (at that level or at all) when its clear that the Financial Firms never pay any taxes by using Liquid Synthetic Instruments. Are we saying that Firms should better manage their treasury’s the same way. Or are we promoting tax avoidance by a privileged few and putting the rest of the non-financial firms which contribute immensely to the economy at a disadvantage? *
  • 12. * * It is in the best interest of the Government that the firms are as competitive as possible * For the Firms its best if they don’t use Transfer Pricing to measure the Efficiency and Performance of its Groups. It leads to Immense Conflicts and renders the Firm Uncompetitive * * The best Law would be to set the Corporate Tax rate using a Formulary approach at… The best option would be a 0% Corporate Tax Rate but that would again lead to exploitation by firms who would register in the country and allocate profits to it while not doing any business in the country and hence not helping the economy Minimum-of(base-rate*100/proportion-of-local-sales-of-global-sales, base-rate*100/proportion-of-local-productioncosts-of-global-production-costs) * If the base rate is 2% then if proportion is 2% (use minimum of 2% in calculations if proportion < 2%) then Applicable Corporate Tax will be 100% of all allocated profits. * * If the base rate is 2% then if proportion is 30% then Applicable Corporate Tax will be 6.67% If the base rate is 2% then if proportion is 70% then Applicable Corporate Tax will be 2.86% * But this by itself will deter Globalization and hence we need to put in another Tax Scaling Factor based on Levels of Economic Contributions e.g. = 0.3 if Sales or Production > $1Bn, = 0.2 if > $2Bn etc. in absolute terms * Governments shouldn’t impose the Arm’s Length Rule as it is in direct conflict with the Economic Viability of the firm’s * Rule: Government’s make nothing from Direct Corporate Tax compared to the benefit (direct & indirect) it derives from the multiplier effects Firms create in the economy. * And that’s exactly what the Governments should focus on. *
  • 13. Cayma n Islands Location Afghanistan Albania 20 20 20 20 20 20 20 20 06 07 08 09 10 11 12 13 0 0 0 0 0 0 0 0 Chile 17 17 17 17 17 20 18.5 20 China 33 33 25 25 25 25 25 25 Colomb ia 35 34 33 33 33 33 33 25 Costa Rica 30 30 30 30 30 30 30 30 20 20 20 20 20 0 20 20 20 20 20 20 20 Croatia 20 20 10 10 10 10 10 10 Ireland 35 35 35 35 35 35 35 35 Cyprus 35 35 35 35 35 35 35 35 Armenia 20 20 20 20 20 20 20 20 Czech Republ ic 28 Denma rk 28 Domini can Republ ic 30 28 28 28 28 28 28 Australia 30 30 30 30 30 30 30 30 Austria 25 25 25 25 25 25 25 25 Bahamas 0 0 0 0 0 0 0 0 Bahrain 0 0 0 0 0 0 0 0 Bangladesh 30 30 30 27.5 27.5 27.5 27.5 27.5 Barbados 25 25 25 25 25 25 25 25 Belarus Belgium Bermuda 24 24 24 24 24 24 18 18 33.9 9 33.9 9 33.9 9 33.9 9 33.9 9 33.9 9 33.9 9 33.9 9 0 0 0 0 Bolivia 0 0 0 0 25 25 25 24 10 24 10 21 10 20 10 19 20 20 27.5 27.5 10 19 10 19 12.5 19 0 0 0 0 0 0 27 26 25 24 25 25 Italy 37.25 37.25 31.4 31.4 31.4 31.4 31.4 Jamaica 33.33 33.33 33.33 33.33 33.33 33.33 33.33 25 Japan 40.69 40.69 40.69 40.69 40.69 40.69 38.01 38.01 Jersey 0 0 0 0 0 0 0 0 25 25 25 25 14 14 14 14 Kazakhst an 30 30 30 20 20 20 20 20 25 25 25 25 25 25 25 Korea, Republic of 25 Egypt 20 25 20 25 25 20 25 25 20 25 25 20 29 24 20 29 23 29 22 25 25 30 El Salvad or 30 24.2 22 24.2 24.2 Kuwait 55 55 55 15 15 15 15 15 Latvia 25 24.2 15 15 15 15 15 15 15 15 40 40 40 40 20 20 20 12.5 12.5 12.5 Libya Liechtens tein Lithuania Estonia 23 22 21 21 21 21 Fiji 31 31 31 29 28 28 28 20 Finland 26 26 26 26 26 26 24.5 21 24.5 33.33 33.33 33.33 33.33 33.33 33.33 33.33 33.33 Georgi a 21 15 15 15 20 15 15 15 15 Luxembo urg 29.63 29.63 29.63 28.59 28.59 28.8 28.8 29.22 Macau 12 12 12 12 12 12 12 12 Macedoni a 15 12 10 10 10 10 10 10 30 30 Malawi Malaysia 28 27 26 25 25 25 25 25 Malta 15 35 35 35 35 35 35 35 35 Mauritius 25 22.5 15 15 15 15 15 15 29 28 28 28 30 30 30 30 9 9 9 9 9 9 9 9 32 32 32 32 32 32 32 32 34 34 33 29.6 25.5 25.5 25.5 25.5 25 25 25 New Zealand 33 33 30 30 30 28 28 28 Nigeria 30 30 30 30 30 30 30 30 10 10 10 Mexico Greece 29 25 25 25 24 20 20 26 Monteneg ro Guate mala 31 31 31 31 31 31 31 31 Mozambi que Guerns ey 0 0 0 0 0 0 0 0 Hondur as 30 30 30 30 25 35 35 35 17.5 17.5 16.5 16.5 16.5 16.5 16.5 16.5 16 16 16 16 19 19 19 19 10 Botswana 25 25 25 25 25 22 22 22 Brazil 34 34 34 34 34 34 34 34 Bulgaria 15 10 10 10 10 10 10 10 20 20 20 20 Cambodia 36.1 36.1 33.5 33 31 28 26 26 Hong Kong Hungar y Iceland * India 30 27.5 22 10 30 27.5 27 10 31.4 27.5 33 10 25 12.5 0 35 10 25 12.5 29 35 10 25 12.5 0 Gibralt ar 10 25 12.5 31 0 10 28 12.5 Israel Germa ny Bosnia and Herzegovina 30 12.5 Kenya Ecuado r France 30 12.5 Isle of Man 0 Bonaire Canada 10 20 34.5 Argentina 35 30 12.5 Jordan Curaca o Angola Aruba Indonesi a 38.34 38.36 29.51 29.44 29.41 29.37 29.48 29.55 18 18 15 15 18 20 20 20 33.66 33.99 33.99 33.99 33.99 32.44 32.45 33.99 Namibia Netherlan ds
  • 14. Norway 28 28 28 28 28 28 28 28 Oman 12 12 12 12 12 12 12 12 Pakista n 35 35 35 35 35 35 35 35 Panama 30 30 30 30 27.5 25 25 25 Papua New Guinea 30 30 30 30 30 30 30 30 Paragua y 10 10 10 10 10 10 10 10 Peru 30 30 30 30 30 30 30 30 Philippi nes 35 35 35 30 30 30 30 30 Poland 19 19 19 19 19 19 19 19 27.5 25 25 25 25 25 25 25 Qatar 35 35 35 35 10 10 10 10 Romani a 16 16 16 16 16 16 16 16 Russia 24 24 24 20 20 20 20 20 0 0 Portuga l Tunisia 35 30 30 30 30 30 30 30 Turkey 20 20 20 20 20 20 20 20 Uganda 30 30 30 30 30 30 30 30 Ukraine 25 25 25 25 25 25 21 19 United Arab Emirate s 55 55 55 55 55 55 55 55 United Kingdo m 30 30 30 28 28 26 24 23 United States 40 40 40 40 40 40 40 40 Uruguay 30 30 25 25 25 25 25 25 Vanuatu 0 0 0 0 0 0 0 0 34 34 34 34 34 34 34 34 Samoa 29 27 27 27 27 27 27 27 Venezue la Saudi Arabia 20 20 20 20 20 20 20 20 Vietnam 28 28 28 25 25 25 25 25 Serbia 10 10 10 10 10 10 10 15 Yemen 35 35 35 35 35 20 20 20 Singapo re 20 20 18 18 17 17 17 17 Zambia 35 35 35 35 35 35 35 35 Slovak Republi c 19 19 19 19 19 19 19 23 Zimbab we 30.9 30.9 30.9 30.9 25.75 25.75 25.75 25.75 Africa average 30.82 30.56 28.65 28.75 28.38 28.55 29.02 28.57 North America average 38.05 38.05 36.75 36.5 35.5 34 33 33 Asia average 28.99 28.46 27.99 25.73 23.96 23.1 22.89 22.49 Europe average 23.7 22.99 21.95 21.64 21.46 20.81 20.42 20.6 Latin America average 29.07 28.3 27.96 27.96 27.52 29.02 28.3 27.61 Oceania average 30.6 30.2 29.6 29.2 29 28.6 28.6 27 EU average 25.01 24.11 23.29 23.22 23.04 22.8 22.6 22.85 OECD average 27.67 27 25.99 25.64 25.7 25.4 25.15 25.32 Global average 27.5 26.95 26.1 25.38 24.69 24.5 24.4 24.08 Saba Sloveni a 25 23 22 21 20 20 18 17 36.89 36.89 34.55 34.55 34.55 34.55 34.55 28 Spain 35 32.5 30 30 30 30 30 30 Sri Lanka 32.5 35 35 35 35 28 28 28 0 0 South Africa St Eustatiu s St Maarten Sudan 34.5 35 30 15 15 15 34.5 34.5 35 35 35 Sweden 28 28 28 26.3 26.3 26.3 26.3 22 Switzerl and 21.23 20.63 19.21 18.96 18.75 18.31 18.06 18.01 Syria 35 28 28 28 28 28 28 22 Taiwan 25 25 25 25 17 17 17 17 30 30 30 30 30 30 30 30 30 30 30 23 20 25 25 Tanzani a Thailan d Trinidad and Tobago http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-ratestable.aspx *
  • 15. Aditya!!! *