Archive for October 2014

German Wishes for Irish Taxes

Ireland has long been a favorite country for multinationals to set up shop in, thanks in part to its 12.5% corporate tax rate – one of the lowest in the world. A typical situation would be for a multinational based in the US or Asia to set up an Irish subsidiary as the principal entity from which to run its European business, thereby allowing it to legally record a significant portion of its European income in Ireland.

But this low tax rate has not been so popular among other European countries, as it is seen as making it difficult to compete with Ireland in their ongoing quiet contest for tax revenues from multinationals. So with the visit of German finance minister Wolfgang Schäuble to Dublin this week to deliver some low-interest loans, The Irish Times posed an interesting question: why hasn’t Berlin demanded that Ireland raise its corporate tax rate in exchange for its assistance?

German officials mystified by inaction on Irish corporate tax rate

German finance minister Wolfgang Schäuble is in Dublin tomorrow to help Ireland’s Halloween party with a €150 million loan from Germany’s KfW state development bank. Matched by the European Investment Bank (EIB), this is the starting capital for Ireland’s Strategic Banking Corporation of Ireland…

As on previous occasions where Ireland was looking for something from Berlin – the prom note reconfiguration, or the bailout itself – Berlin demanded something in return, having already given Dublin what it wanted first…

Given the regular German swipes at Ireland’s 12.5 per cent tax rate, it’s interesting that Berlin never followed the Cyprus strategy. Last year, Nicosia was “encouraged” to make a sovereign decision to raise corporate tax rates as a precondition for the required assistance.

It’s a good question, though I’d like to rephrase it slightly: why does Germany treat Ireland so differently from Cyprus when it comes to providing financial assistance? One possible explanation is that the corporate tax rate in Cyprus, which had been set at 10%, was seen by Germany as being more egregious than Ireland’s rate. But it may also be a subtle symptom of the north-south divide in Europe that has emerged so strongly in recent years. The distrust and hostility between northern European nations and southern Europe has been displayed in many ways since the Eurozone crisis began in 2009-10. Perhaps this is another one.

What Is This ‘BEPS’ Thing, and Should I Care?

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You have almost certainly seen news stories recently about how global companies like Apple, Amazon, and Starbucks reduce their tax bills through clever use of international tax planning. You may also have come across the term ‘BEPS’ sprinkled liberally through the business news over the past month or two. If so, your eyes probably glazed over at the time. But since a number of my non-transfer pricing specialist friends have been asking me what ‘BEPS’ actually is and whether they should care, I thought I would take a moment to try to connect the dots and explain what it’s all about.

As these stories about global companies paying little or no tax in certain jurisdictions have become regular front page items in the business press, the issue has drawn the attention of the world’s political leaders. For better or worse (and I think it’s probably for the better – the system is sort of a mess in my opinion), corporate tax policy has become a hot political topic in recent years, as noted by the OECD:

 downloadThe debate over base erosion and profit shifting (‘BEPS’) has reached the highest political level and has become an issue on the agenda of several OECD and non-OECD countries… The G20 leaders’ meeting in Los Cabos on 18-19 June 2012 explicitly referred to “the need to prevent base erosion and profit shifting” in their final declaration. G20 finance ministers, triggered by a joint statement of United Kingdom Chancellor George Osborne and German Finance Minister Wolfgang Shaüble, have asked the OECD to report on this issue by their meeting in February 2013. Such a concern was also voiced by US President Barack Obama in his Framework for Business Tax Reform, where it is stated that “the empirical evidence suggests that income-shifting behaviour by multinational corporations is a significant concern that should be addressed through tax reform”.

In other words, governments around the world have decided that it’s time to consider reforming corporate tax policy.  But since global corporations are, well, global, it is widely recognized that such a project really needs to be internationally coordinated if it’s going to be successful.  That’s where the OECD and its BEPS project comes in.

The BEPS project is essentially a bunch of working groups, composed of officials from the world’s largest economies, that are tasked with the job of trying to figure out how the international tax landscape for corporations should be changed.  They are focusing on a few specific areas, including but not limited to:

  • Tax avoidance by digital companies: Do different rules need to be created to specifically address the digital economy?
  • Financial loopholes: What changes need to be made to prevent companies from using financial instruments like intercompany loans to avoid paying tax on some of their income?
  • Intangibles: Should international transfer pricing norms be revised to make it harder for companies to reduce their taxes simply by moving their intangibles to low-tax jurisdictions?
  • Documentation: What sort of international reporting standards could be imposed to make it harder for global companies to shift their income into low-tax jurisdictions?

In a nutshell, the BEPS project is the attempt by the world’s major economies to try to rewrite the rules on corporate taxation to address the widespread perception that they don’t pay their fair share of taxes.  So despite its opaque acronym, and even though they don’t know it, BEPS is actually something that millions of people around the world feel strongly about.

In future posts I’ll address some of the questions you might be asking yourself at this point, like:

  • Will any of the BEPS agenda items actually result in higher tax bills for global companies, and if so, which ones?
  • Do different rules really need to be created to specifically address the digital economy?
  • Is BEPS a good way to address the issue of corporate taxation?

In the meantime, keep your eyes open for mentions of BEPS in the news.  And the next time you come across that obscure acronym, hopefully you’ll be able to see through it to the substantial international effort to address corporate tax policy that it represents.

Fighting Over Tax Revenue in Europe

There’s been a burst of news recently about how multinational companies (“MNCs”) use corporate structures (and of course the transfer pricing that goes with it) to reduce their tax bills. Starbucks, Apple, and most recently Amazon have all been getting lots of unwelcome press about their European tax planning strategies.

This is nothing new, of course. But there does seem to be a slightly different flavor to the criticism this time around. In the current round of attention it seems that national tax administrations are coming under as much scrutiny as the companies involved, with certain countries being accused of essentially colluding with MNCs to facilitate their tax minimization. Last week we learned that the EU has commenced an anti-competition investigation against Luxembourg related to the tax treatment that the country applies to MNCs.  And this week it was announced that Ireland will, under pressure, revise its tax regulations to eliminate one type of corporate structure that MNCs can use to reduce their tax liabilities.  The Economist reports:

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BONO may front one of the world’s most popular rock bands, but the U2 singer did not earn many new fans when he recently defended Ireland’s controversial tax policies, which are widely seen as helping multinationals to avoid paying their fair share. Even Ireland’s government seems to be having doubts. On October 14th it announced plans to close the country’s biggest loophole, the “Double Irish”.

The Double Irish allows companies to shift their profits from high-tax countries to havens… Users can thereby cut their effective tax rate—perfectly legally—far below Ireland’s already low 12.5% rate, in some cases down to less than 2%…

From January all new companies domiciled in Ireland will also have to be tax-residents there, making the Double Irish impossible. Ireland is acting under pressure from America, the European Commission and the OECD, which are working on multilateral reform of international tax rules to curb avoidance.

On one level focusing attention on the countries involved, rather than MNCs, makes perfect sense.  After all, MNCs are simply doing the best that they can for their owners, given each country’s tax rules as they are written. (The degree of involvement that MNCs have in the writing of those tax rules is an interesting but separate question that we’ll have to leave for another time.) So if you think that MNCs should pay higher taxes, you really should be directing your criticism at the creators and administrators of tax regulations, not the taxpayers.

But why now?  And why does the attention seem to be falling not on those stereotypical sunny, shorts-wearing, palm tree-fringed, tropical island tax havens, but instead on respectable (if rather more gloomy, weather-wise) northern European nations like the Netherlands, Luxembourg, and Ireland?

I think a couple of factors are contributing to this.  First of all, I don’t think it’s a coincidence that the countries in question are EU members. In case you hadn’t noticed, the EU has been going through a bit of an economic rough patch over the past few years. The eurozone financial crisis that began in earnest in 2010 has highlighted and contributed to dramatic differences in economic performance and budget policy between EU member nations. Suspicion and resentment between European countries over economic and financial issues has probably never been greater since before the second world war.

But more specifically, I think that the troubled economic landscape in Europe over the past several years has brought to the forefront something that usually lies unseen in the background, but which transfer pricing practitioners are constantly reminded of: the world’s major countries are engaged in a constant, usually quiet battle with each other for tax revenue from MNCs.  It’s not quite true that MNC tax payments are a zero sum game, but as a first approximation that idea captures how tax administrations view the problem.  Each MNC has a pie of global tax payments. And each tax administration wants to capture as large a slice of that pie as they can.

So as many European countries feel the accumulated burden of years of economic and financial struggle, it’s not surprising that they have become more aggressive with each other in their battles over the share of the tax revenue they can claim from the world’s largest MNCs. I think this phenomenon will help keep the pressure on the participants in the OECD BEPS project to make sure that the new rules that come out of those negotiations are quite strict. And I’m sure we haven’t heard the last of how Europe’s low-tax jurisdictions help the world’s MNCs to reduce their overall tax bills.

A New Arena for Transfer Pricing Disputes

You may have seen last week’s news that the tax treatment of Amazon by the country of Luxembourg is being examined by the European Commission as a possible violation of EU competition rules.This follows the opening of similar investigations by the EU into the tax arrangements of Apple, Starbucks, and Fiat.

This is interesting for a variety of reasons.  First of all, this marks one of the first times that transfer pricing arrangements are being actively and specifically scrutinized not by any national tax authority, but by a multinational body with no direct financial stake in the outcome.  Secondly, the tax authorities of Ireland and Luxembourg — i.e., the tax authorities that stand to gain tax revenue if the EU rules against the companies in each case — are actually in the position of defending those companies, even though if they lose the legal battle with the EU, they stand to gain billions of dollars in tax revenue.

But perhaps the most fascinating aspect of this development is that transfer pricing is now being explicitly and directly addressed as an aspect of competition policy, rather than simply as a tax matter. The Economist put it thus (subscription required):

[T]he European Commission has been exploring those dark recesses to establish whether multinationals’ arrangements with tax-friendly Ireland, Luxembourg and the Netherlands amount to illegal subsidies. For the three companies targeted so far (Apple, Fiat and Starbucks), and for the many others that routinely engage in complex tax-planning, the probes have taken the crackdown on cheeky tax avoidance into uncomfortable new territory…

Citing minutes of meetings between Apple’s tax advisers and officials, the commission suggests they reached a quid pro quo in which the company was allowed to shelter profits from tax in return for maintaining jobs. The suspected mechanism was “transfer pricing” agreements that deviated from international accounting guidelines, which require transactions between group subsidiaries to be priced at market rates. The costs attributable to one Irish subsidiary appear to have been “reverse-engineered” to arrive at a certain level of taxable income with “no economic basis”, says the commission.

These investigations and the resulting legal fallout could have substantial implications well beyond the companies and countries in question. If transfer pricing arrangements become subject to anti-competition investigations in addition to scrutiny from tax authorities, the regulatory landscape suddenly has the potential to look very different from what we’re used to.  Stay tuned.

Welcome

Welcome to the website of MINA Economics. My name is Kash Mansori, and I’m an economist who has been thinking, reading, and writing about transfer pricing for over 15 years. My firm provides economic consulting services to clients around the world; we specialize in solving economic problems and providing analyses and documentation for transfer pricing, valuation, international supply chain management, and related business economics purposes.

In addition to performing directly client-related work, I also spend a lot of time keeping up with the field of transfer pricing more generally. While that’s an eye-glazing proposition to most sensible people, it so happens that I actually like this stuff and find it interesting.  And that’s why I thought it might be helpful for me share my understanding and perspective to interested readers through this blog.

My intention is to develop this blog into a useful resource for transfer pricing information and analysis for economists, transfer pricing practitioners, corporate management, and tax specialists.  Some of the information on here will about be things that I’ve come across or read (so you don’t have to), while other posts will be intended more for my colleagues in the consulting profession, as a way to help advance our understanding and ability to help solve the problems confronting many of our clients.

Content to be provided here will include:

  • News about significant policy developments related to transfer pricing and international taxation;
  • Summaries of and links to interesting articles written by transfer pricing professionals;
  • Occasional primers on various aspects of transfer pricing that the consumers of transfer pricing consulting services might find useful;
  • Analysis of trends, techniques, and other recent developments in the field;
  • And who knows what else…?

New posts should be available several times per month, so feel free to check back from time to time for the latest news and analysis.  And please note that feedback is encouraged; you’re welcome to comment on specific articles or posts, or to simply contact me directly with questions or suggestions.  I’ll even take requests, so if there’s an issue in transfer pricing that you would like me to explore in this blog, just let me know.  In the meantime… enjoy!