global tax shifting requires global solutions

Global Tax Shifting requires Global Solutions

Dr Elfriede Sangkuhl

Introduction• The size of the transfer pricing problem• Normal transfer pricing explained• Abusive transfer pricing considered• Late Sovereignty examined• Proposal for the global taxation of the

profits of Transnational Corporations

Possible Global Taxes• Environmental• Currency speculation: a Tobin Tax• Global profits taxes on Transnational

Corporations (TNC’s)

Corporations and GlobalisationCorporations earn profits worldwide, shift profits by

the use of transfer pricing and therefore shift tax payable into favourable tax jurisdictions. In order for nations to effectively tax transnational corporations (TNCs), nations have to make a claim to sovereignty as the authorityto impose that taxation.

The Global Impact of TNCsIt has been estimated that “the world’s largest

100 corporations control 20 per cent of global foreign (to the United States) assets and around 60 per cent of world trade is internal to multinational corporations”.

(Woodiwiss M, Gangster capitalism: the United States and the global rise of organised crime, Constable and Robinson Ltd, United Kingdom, 2005, p187)

Global Impact of Transfer Pricing

The 1,000 Billion dollar question.

The impact of Transfer Pricing on Australian Taxation Revenues

Transfer Pricing

The single most effective tool that corporations use to minimise their tax liabilities is transfer pricing. Transfer pricing is uniquely available to corporations and is the most common tax planning tool used by corporations.

The Great Banana Scam

The Banana Business• Most bananas are grown and eaten locally• The world trade in bananas is from the

south to the north• The world trade exceeds 50billion Euros

annually• The world trade is dominated by 3

companies, Chiquita, Dole and Del Monte

The Great Banana ScamProducer Country Cost 12 cents, profit 1 cent Cumulative Cost 13 cents

Cayman Islands Purchasing – 8 cents 21 cents

Luxembourg Financial Services – 8 cents 29 cents

Ireland Brand – 4 cents 33 cents

Isle of Man Insurance – 4 cents 37 cents

Jersey Management – 6 cents 43 cents

Bermuda Distribution – 17 cents 60 cents

Consumer Country Retailer Margin – 40 cents $1.00

Google the Good Corporate

In the US in 2010 Google used Transfer pricing to avoid about $US60 billion

In Australia in 2009 Google shifted between $500 to $700m of Australian sales to Ireland avoiding about $160m in company tax.

Abusive Transfer Pricing• Abusive Transfer Pricing is a subset of

‘dirty money’, that is money illegally earned, transferred or utilised.

Dirty Money (2005)

Global Dirty Money in US$ Billions.• Criminal money from organised crime, 331

– 549 • Corrupt money, ie bribes, 30 – 50 • Commercial tax evading 700 – 1000 • Total 1061 – 1599

Abusive Transfer Pricing• Of the global dirty money estimated by

Baker, abusive transfer pricing accounts for $US300b to $US500b per annum.

Examples of Abusive Pricing

Exports from the US• Bulldozers $527.94• ATM Machines $35.93• Missile Rocket Launchers $40.00• TV Antennas $0.04

Examples of Abusive Pricing

Imports to the US• Flashlights $500.00• Ink-jet printers $179,000.00• Razor Blades $461.00• Tweezers $4,896.00

Westphalian Sovereignty• Understood as the move from medieval

system “to a territorial form of rule with internal hierarchy and horizontal equality among all members”.

• Friedrich Kratochwil, ‘Legal Theory and International Law’, in David Armstrong (Ed) Routledge Handbook of International Law, 2009, 59

Definition of Sovereignty• ‘a plausible and reasonably effective claim

to ultimate authority... made on behalf of a society, which is (more or less successfully) constitutive of that society as a political society, or as a polity. (Walker 2003)

Australian Sovereignty

European Sovereignty

Sovereignty Now

The capacity of sovereignty is its ability to deal with what Walker calls ‘sovereign sites’. Sovereign sites encompass both the territorial and normative reach of sovereignty.

Neil Walker, ‘Late Sovereignty in the European Union’, in Neil Walker (ed), Sovereignty in Transition, (Hart Publishing, 2003), 30

Messy SovereigntyThe challenge of multinational capital, of global

communications and of free movement of goods, services, persons and capital is beyond the regulatory grasp of the state, and the grant of regulatory authority to non-state polities (as happens in the EU, NATO, ASEAN and other supranational bodies) consolidates and reinforces that process.’

Neil Walker, ‘Late Sovereignty in the European Union’, in Neil Walker (ed), Sovereignty in Transition, (Hart Publishing, 2003), 24

Messy Sovereignty – the solution?

• The band aid solution

Proposal for Global Taxation of TNCs

US profit apportionment between the states on the basis of;

• Sales• Property• Employees

Global Apportionment• Requires consolidated profit reporting

according to International Accounting Standards to an international taxing authority

• Requires the international apportionment of profits between national jurisdictions

Global Apportionment

Positives;• Profits only taxed once• Process is transparent• Nation states retain autonomy over

revenue raised• Formula can be adjusted, refined eg to

take account of externalities

A Global Taxing Authority