Two days of meetings on international tax took place last week at the UN Headquarters. Here's the inside track on what was discussed.
The first day was all about transfer pricing. Transfer pricing is the term given to the way in which companies that are related to each other, mainly the subsidiaries of multinational companies, trade with one another. The impact of this internal trade is to determine the level of profit that arises in each component of the company.
As we were able to show in our report exposing beer giant SABMiller, multinational companies are able to exploit the complex transfer pricing guidelines and the fact that developing countries often do not have the capacity to audit companies, in order to shift profits to low tax jurisdictions and thereby avoid paying large sums in tax. The challenges for developing countries include that:
a) The rules on transfer pricing have been developed by the OECD (a rich country club of 34 developed countries)
b) The OECD transfer pricing rules are technical, requiring numerous well trained tax officials in order to implement them, as well as a large volume of data which is very limited in developing countries.
The UN tax committee’s work on transfer pricing aims to redress the balance on transfer pricing rules by bringing developing countries together to adapt the OECD Arms Length Price (ALP) rules and find alternatives that are more feasible for developing countries.
The OECD’s ALP essentially requires that a company decide its transfer price by finding a comparable transaction of the same or a similar good or service between unrelated companies. However because this price is affected by which country the transaction takes place in and must be publically available, developing countries have a hard time finding such a comparable transaction. Nevertheless the OECD and its member countries want the developing world to stick with its rules.
The tectonic plates of international tax are shifting
It seemed pretty clear at the meetings that the status quo – the pre-eminence of the OECD - is not sustainable. Many countries made this point, led most vociferously by India. This is tax catching up with the broader shift in international power dynamics across many issues of global governance.
A letter from India to the UN Committee pointedly stated that “These guidelines only protect the interests of the OECD countries. Since the governments of the developing countries are not party to the Guidelines it is improper to suggest that they represent internationally agreed guidance.”
Need for simplification of transfer pricing guidlines
Everyone at the meetings – even, it seemed, the OECD - agreed that the OECD guidelines are too complex for developing countries. But they didn't agree on how far it may be necessary to deviate from the OECD approach to make them work, or where these discussions should take place.
The status of the UN committee
Although the UN is the most legitimate forum for all countries to agree on international tax rules, at the moment the committee is made up of experts who mainly volunteer their time to make progress on these issues. The OECD member countries are opposed to upgrading it to a Commission which would make it inter-governmental with official representatives of governments.
The work that the UN tax committee is doing is vitally important but developed countries are not adequately supporting it with dedicated funding. Providing a decent amount of funds to the committee (and thereby to developing countries seeking to more effectively tax multinational companies) is one of the things we think the UK government should do in response to the International Development Select Committee's inquiry on tax and development.