The obvious benefits of globalisation are accompanied by a growing complexity in the process of managing multinational corporations (MNCs hereafter) and taxing them. Flows of raw materials, products in process, goods, services and intangibles surround the globe, influencing the everyday life of every one of us. These flows have an interesting characteristic: Allegedly more than 60 % of their volume occurs within MNCs (Owens, 1996) – as intra-firm trade – and as such influence the balance inside the MNC.
The prices used in these transactions determine the profits of the mother company and its subsidiaries, influencing trade balances, employment, exchange rates of currencies and not least tax collections. With the gradual growth of world trade, the opening and expansion of markets, and the growing trend of M&As, we can expect the effects of intra firm transactions, and thereby Transfer Pricing (TP hereafter), to grow in the future. MNCs are increasingly adopting the strategy of the transnational organisation, towards a flatter, more responsive and interdependent structure that is more in terms with this new environment (Bartlett et al, 2003).
MNCs therefore have more transfers of all kinds between its units and hence it has become more of a controversy to allocate corporate taxes fairly on national levels. TP is a powerful tool to move funds from one business unit to another and from country to country, and as such creates opportunities for tax evasions. Loraine Eden, a leading scholar in the field of taxation and TP, clarifies this point: “It is not TP that is the problem; it is the potential for TP manipulation that governments fear and want to prevent through regulation.
However what one sees as legitimate forms of price settings may be seen by others as evasive and illegitimate manipulation” (Eden, 2001). This quote presents the problem from a government’s point of view. However, looking from a broader perspective, it is not so important which country collects the taxes. Here the major concern is the cases were profits are not taxed at all – as in the case of tax heavens. The issue of TP touches upon the international tax regimes and the commonwealths of states and the OECD that try to suggest and organize the international legal standards.
As a final agreement is not within reach, there will continue to be discrepancies between the taxation of internationally traded goods, funds and intangible goods and the public’s perception of just distribution of wealth. A key question regarding TP is; what is the right price? And moreover, what is the yardstick for the right price? Finding the answer becomes more difficult when dealing with services and intangibles, were the benchmark is not absolute. 3 METHODOLOGY AND RESEARCH DESIGN This section will explain the working process of the assignment.
This was done due to the complexity of the subject, to begin with an explanatory section where the motives and process of the report as a whole are reasoned. Nevertheless the overall project structure is very descriptive. The main purpose of this assignment should be to have a covering academic discussion about TP. Thus providing the reader with a broad overview of what the concept is fundamentally about. Furthermore other aspects of TP will be discussed such as regulations and the international business environment. The following part will shed light on the items, mentioned above.
3. 1 A Possible Research Question Over the last few decades international trade has intensified, and MNCs and their subsidiaries are becoming evermore connected through various modes of internal transfers. This makes TP a growing concern, both for MNCs and authorities – therefore the research is as follows: -What are the motives behind the use of transfer-pricing as a tool, and what problems does this create? -What role does the OECD play in this context? 3. 2 The Structure of the Paper This is how the paper looks like after completion:
Introduction, Method and Research Design This section elaborates on the subject and explains why the subject was chosen and why it is interesting. The second part (Method) will argue how the group decided to structure the paper at the early stages of the process. The Research Design explains how the working process has evolved towards getting a solution in terms of answering the research question. In other words, how is the challenge being dealt with at its final stage? Furthermore the project will be illustrated visually at this place. 3. 2. 2 Transfer-Pricing and Regulations
The mechanics of TP will be explained. Furthermore the question why TP has such importance will be addressed. The issue of incentives or motives for using TP as an instrument will be examined. In this section a simple example of how TP could work in practice and the main uses of TP will be discussed. Relating to this the main motives for regulatory steps in curbing transfer pricing policies will be addressed in the same section. Looking at the project in its entirety, this is where emphasis is put as this constitutes the very core of the issue.
Solid empirical background is demanded as well as analytical skills for fulfilling our ambitions. 3. 2. 3 The Danish perspective This section will discuss the concept of TP in the Danish perspective. In other words the magnitude of TP in the Danish debate will be addressed in this section. Among other things the DR2-documentary “Skatte-akrobaterne” will help to shed light on the issue. But in order to fully grasp this debate, the Danish corporate tax level, will have to be taken into account as well.
Finally the state of the Danish controversy is compared with other OECD countries (), in order to give the best general picture of the situation in a broader perspective, compared with issues in other OECD countries, in order to put the general picture into perspective. 3. 2. 4 Conclusion/Rounding off The research question will be answered here, and a general discussion of the papers findings will be presented. In addition, we will discuss a possible theoretical principle for allocating taxes that are collected globally 3. 3 Defintions and Assumptions For clarity the following definitions are applied throughout this paper:
– Transfer Pricing (TP) and International Transfer Pricing. These two terms are used interchangeably in the literature and by sources that constitute the research base in this paper. Although different sources have varying definitions of the two terms, we accept the one defined in the following section and thus using the abbreviation TP. Most important is that beside its other properties TP relates to transactions between two or more countries. – Abusive TP: Whether TP is harmful, unlawful or unethical, the term abusive is applied in this paper.
Abusive, or abuse – a very illusive term indeed – takes on the meaning of an action viewed upon by the general population or its government as being counterproductive to the overall benefit of society. Naturally, this term might take on a varying meaning in varying geographical, legal or cultural settings. However, we ask the reader to have in mind in which contexts the term is used. – Throughout this paper the term MNC will be used as the overarching term for whatever organisational structures internationally trading corporations adopt. It also substitutes other for abbreviations such as MNE and MNG.
