Tuesday, July 16, 2019

Legalised Thievery

There’s a wide range of of tax avoidance schemes played by multinationals: Transfer mispricing, abusive transfer pricing, trade misinvoicing, base erosion and profit shifting (BEPS), and re-invoicing—they all fall under the umbrella of trade mispricing, or the intentional falsification of transactions on an international level. The short-term goals for mis- or re-invoicing vary. In some cases the desired outcome is to dodge capital controls (a strategy commonly used in emerging markets to reduce rapid cash outflows). In other cases, the incentive for misinvoicing is to claim tax incentives or avoid paying duty. Generally, the scheme is this: shift profits out of high tax countries and into low tax countries, or tax havens, while ensuring that the majority of the expenses are assigned to high tax countries. Transfer pricing—the pricing of commodities traded between or within multinational enterprises—is a legal practice and a key feature of cross-border and intra-firm transactions. 

 A key concern are tax havens. 214,000 offshore entities are cited in the Panama Papers. After the release of the Panama Papers—just two years later -  a U.S. PIRG study found that 73 percent of the Fortune 500 companies operated 9,755 tax haven subsidiaries. 

In 2015, Global Financial Integrity (GFI) published a study revealing that in 2013 an astounding US$1.1 trillion was stolen annually—or nearly $3 billion a day—from developing countries due to trade mispricing

Raymond C. Offenheiser, the former president of Oxfam America, in his 2006 description of tax havens as being “the core of a global system that allows large corporations and wealthy individuals to avoid paying their fair share, depriving governments, rich and poor, of the resources they need to provide vital public services and tackle rising inequality.”

Amazon.com Inc. was brought to court by the Internal Revenue Service (IRS) in 2017 for transfer pricing discrepancies. In 2005 and 2006, the multinational tech company transferred $255 million in royalty payments to its tax haven in Luxembourg, but according to the IRS these royalty payments should have amounted to $3.5 billion. This transfer pricing adjustment would have increased Amazon’s federal tax payments by more than $1 billion The loss of this much cash in federal tax revenue is substantial. Take for instance the water crisis in Flint, Michigan—if the city’s estimated costs of $55 million to replace the pipes are accurate, then Amazon’s tax payments could have saved the 100,000 residents from lead poisoning 18 times over.

Tax haven subsidiaries function as cash canals to transport taxable profits with the goal of lowering or, if you are Amazon Inc., entirely avoiding tax payments. But a company’s subsidiary in a tax haven requires financial sleights of hand to get the cash safe. Take for instance the Goldcrest method Amazon used in Luxembourg. It shifted its intellectual property rights (or intangibles) that were held by its U.S. parent company to its subsidiary, Amazon Lux. The subsidiary then collected royalties tax-free on international sales. Google and Ikea, similarly, decided to play the “Going Dutch” move, using their subsidiaries in the Netherlands.
The “Swiss Sidestep” is another tax play, and rather than royalty payments, “management service fees” are the key element. By paying a value-added service fee to a sister company in a European tax haven, a company can “side-step” tax payments by converting profits into fees. And, then, of course, there is the privacy and protection that a company gets on the island of Mauritius—with the “Mauritius Maneuver” a person can send their cash to Mauritius to avoid income tax and then bring it back—without a trace—as “foreign investment.”
Suppose a company extracts 2 megatons (MT) of cobalt from Papua New Guinea (PNG) and then exports the 2 MT (or 1 million kilograms) at the price of US$5 per kilogram, but imports into Canada—by way of Mauritius or the Netherlands—the same 2 MT of cobalt at the price of US$10. The result for PNG is the loss of tax revenue on $5 million. Even at a mere 5 percent tax rate with these modest and imaginative figures, a loss of US$250,000 for PNG is significant. Also in the hypothetical PNG scenario, for instance, one glaring concern that arises from this manipulative business practice is the implication that the people of PNG are somehow unaware of the value of their own resources.

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