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Taxes, Transfer Pricing, and the Multinational Enterprise

Lorraine Eden

in Oxford Handbook of International Business

An outline is given of the complex issue of transfer pricing (the cross‐border intra‐firm transactions between related parties), as seen by multinational enterprises (MNE) managers and by governments ... More

An outline is given of the complex issue of transfer pricing (the cross‐border intra‐firm transactions between related parties), as seen by multinational enterprises (MNE) managers and by governments faced with the task of taxing business profits. First, transfer pricing from the MNE's perspective, and the problems that this raises for national governments, are briefly discussed. The basic rules of international taxation as they apply to MNE profits are then reviewed. The specific rules and procedures that apply to transfer pricing, as practised in the USA and recommended by the OECD, are then outlined. The rest of the chapter discusses an alternative approach to taxing MNEs—the arm's length standard, which is based on separate accounting or the separate entity approach, and outlines future trends that are likely to have major impacts—globalization, regionalization, and the Internet.Less

 The Case against Foreign Direct Investment and Multinational Corporations

Stephen D. Cohen

in Multinational Corporations and Foreign Direct Investment: Avoiding Simplicity, Embracing Complexity

Only the most rabid proponents deny the potential for MNCs and FDI to inflict costs and harm on large numbers of people and countries. This chapter is the equivalent of a law brief, this time ... More

Only the most rabid proponents deny the potential for MNCs and FDI to inflict costs and harm on large numbers of people and countries. This chapter is the equivalent of a law brief, this time one-sidedly expounding on the merits of the opposite side of the case and offering a totally different perspective on how to evaluate FDI and MNCs. Once again, no effort is made to replicate the emphasis in earlier chapters on the need for a balanced, objective approach to a subject dominated by heterogeneity, complexity, and subjectivity. The downsides of MNCs and FDI are discussed in terms of their demonstrable threat to a country's overall economic growth and prosperity as the result of the inherent conflict between their single-minded pursuit of profits and the interests of the host country's population. More specific costs such as intimidation of government officials anxious to promote and retain inward FDI, bribing regulators, tax avoidance, reduced competition in the marketplace including price collusion, diminished union and worker negotiating leverage, increased pollution, and increased capital outflows in the form of profit remittances, are also discussed.Less

Transfer Pricing and Enforcement Policy in Oligopolistic Markets

Oscar Amerighi

in Foreign Direct Investment and the Multinational Enterprise

In this chapter, multinational enterprises (MNE) and their effect on transfer pricing, taxable profits and payments are explored. One of the purposes of the chapter is to consider the international ... More

In this chapter, multinational enterprises (MNE) and their effect on transfer pricing, taxable profits and payments are explored. One of the purposes of the chapter is to consider the international taxation of MNEs and enforcement of the arm’s-length principle. The analysis carried out in the chapter is heavily reliant upon the work done by Kind, Midelfart Knarvik, and Schjelderup on the study of the effects of economic integration on equilibrium taxes. Both Peralta’s and Kind’s models are modified in order reveal that as governments increase the level of enforcement as a response to transfer pricing, the results show that equilibrium tax rates also increase. An analysis is then made on the effects of increased economic integration on transfer pricing and quantity decisions by MNEs when facing two policy instruments. In the end, increased economic integration is shown to affect corporate profit tax rates in either a race to the bottom or a race to the top.Less

The Arm’s Length Standard: Making It Work in a 21st-Century World of Multinationals and Nation States

Lorraine Eden

in Global Tax Fairness

Many transfer pricing experts argue the arm’s length standard (ALS) is “dead” and should be replaced by a formulary apportionment system that allocates the profits of a multinational enterprise among ... More

Many transfer pricing experts argue the arm’s length standard (ALS) is “dead” and should be replaced by a formulary apportionment system that allocates the profits of a multinational enterprise among its home and host countries using a formula based on capital, labor, and sales. Criticisms of the arm’s length standard fall into two categories: concerns that (1) abusive transfer pricing by multinationals is rampant, unfair, and draining development; and (2) the current transfer pricing rules are difficult to implement in theory and in practice. This chapter assumes that, at least for the foreseeable future, the arm’s length standard will be the predominant method for taxing related party transactions within multinational enterprises. Its focus is therefore to recommend changes within the current ALS system to improve its workability in a world of twenty-first-century multinationals and nation-states.Less

The Impact of Transfer Pricing on Intrafirm Trade

Kimberly A. Clausing

in International Taxation and Multinational Activity

Multinational corporations (MNCs) play a very large role in international trade. Not only is there a substantial amount of arm's-length trade between MNCs and unaffiliated buyers, but trade within ... More

Multinational corporations (MNCs) play a very large role in international trade. Not only is there a substantial amount of arm's-length trade between MNCs and unaffiliated buyers, but trade within MNCs is also quite considerable. For instance, in 1994, this intrafirm trade accounted for approximately 36 percent of exports and 43 percent of imports in the United States. These fractions vary somewhat from year to year, but intrafirm trade has been a similarly large share of international trade since 1977. Recently, researchers have devoted some attention to examining how intrafirm trade may be different from arm's-length trade. One essential reason intrafirm trade may differ from non-intrafirm trade results from the fact that MNCs may alter their transactions in order to minimize worldwide tax burdens. This chapter discusses the impact of transfer pricing on intrafirm trade. Using data on the operations of U.S. parent companies and their foreign affiliates, it examines the relationship between the tax minimization strategies of MNCs and intrafirm trade. The results indicate that taxes have a substantial influence on intrafirm trade flows.Less

Strategies for Addressing Capital Flight

James K. Boyce

Leonce Ndikumana (ed.)

in Capital Flight from Africa: Causes, Effects, and Policy Issues

Drawing on the literature and new evidence presented in the other chapters of the book, this chapter discusses strategies to stem capital flight from African countries. It emphasizes the importance ... More

Drawing on the literature and new evidence presented in the other chapters of the book, this chapter discusses strategies to stem capital flight from African countries. It emphasizes the importance of the distinction between licitly and illicitly acquired capital, and the need to tailor strategies to the specific type of capital flight concerned. Policies to prevent the illegal export of honestly acquired capital and strategies to address both trade-related capital flight and transfer pricing are examined. The chapter then turns to strategies for preventing asset theft and for tracking and repatriating stolen assets. It discusses the burden of odious debts and the role of debt audits in addressing this problem. Finally it maps the contours of a global compact for the prevention of capital flight and tax evasion.Less

Parastatals and Workers

Andrew Coulson

in Tanzania: A Political Economy

The years after the Arusha Declaration saw a proliferation of parastatals, or government corporations, in almost every sector, including industry, agriculture, banking, trade, transport and housing. ... More

The years after the Arusha Declaration saw a proliferation of parastatals, or government corporations, in almost every sector, including industry, agriculture, banking, trade, transport and housing. The Government negotiated compensation with the owners of the banks and large factories that were nationalized, and run as parastatals––Government-owned arms-length bodies. Many new factories depended on protection provided by tariffs on imports. But transfer pricing, which provided a mechanism for international companies to take money out of Tanzania, was an issue from the start. The State Trading Corporation, which in 1970 took over the import of all consumer goods, building supplies and agricultural inputs encountered many problems, as did the Mwananchi Engineering and Construction Company (MECCO), the state-owned construction parastatal. The chapter also explores the dilemmas faced by the Party when it encouraged worker and Party involvement in the management of industries, at the same time crushing workers’ initiatives in particular factories.Less

Myron S. Scholes

Roger W. Spencer and David A. Macpherson

in Lives of the Laureates: Twenty-three Nobel Economists

This chapter looks at the career of Myron S. Scholes who received the Nobel Prize in 1997. Born in 1941, Scholes went to McMaster University for his B.A. and completed his Ph.D. at the University of ... More

This chapter looks at the career of Myron S. Scholes who received the Nobel Prize in 1997. Born in 1941, Scholes went to McMaster University for his B.A. and completed his Ph.D. at the University of Chicago in 1969. He became a professor at the Graduate School of Business, University of Chicago, and a professor of finance, emeritus, at Stanford University. Together with Mark Wolfson, he developed a new theory of tax planning under uncertainty and information asymmetry. His work as an economist was shaped by attempts to conceptualize and test real-world problems. He helped invent the concept of the index fund. His other works involved developing models to explain changes in the prices of risk transfer and liquidity in the market. He wrote Taxes and Business Strategy: A Planning Approach in collaboration with Wolfson.Less

Capital Flight, Safe Havens, and Secrecy Jurisdictions

Frank Barry

in Capital Flight from Africa: Causes, Effects, and Policy Issues

The terms “safe haven” and “secrecy jurisdiction” are arguably more appropriate than “tax haven” or even “offshore financial center” in discussing capital flight. Most capital flight is thought to ... More

The terms “safe haven” and “secrecy jurisdiction” are arguably more appropriate than “tax haven” or even “offshore financial center” in discussing capital flight. Most capital flight is thought to reflect the transfer—typically to jurisdictions characterised by strong financial secrecy regulations—of the receipts of plunder, money laundering, and tax evasion. These same jurisdictions are occasionally used by governments to dodge reparations, evade the impact of sanctions, and covertly fund political interference in rival states. This chapter considers how safe havens operate and facilitate capital flight. It reviews the arguments over financial secrecy laws and practices, and considers recent multilateral and unilateral attempts—by the OECD, the EU, the US, and others—to counter secrecy abuses.Less

Oil: An industry in trouble

Angela Penrose

in No Ordinary Woman: The Life of Edith Penrose

The chapter covers Edith’s research into the oil industry and multinational companies, and the rise of the Organization of Petroleum Exporting Countries, including publication of The Large ... More

The chapter covers Edith’s research into the oil industry and multinational companies, and the rise of the Organization of Petroleum Exporting Countries, including publication of The Large International Firm in Developing Countries (1968), which challenged the traditional theories of international trade and investment as they applied to the oil industry. She was the first to discover the significance of transfer pricing and tax avoidance. She started seminars on the international petroleum industry with Peter Odell and later with Robert Mabro, at St Anthony’s College, Oxford. Edith travelled extensively, analysing the impact of multinationals on the economic welfare of the countries in which they operated, focusing on the efforts made by governments to retain as much as possible of their economic and political sovereignty, while still benefiting from the resources and capabilities of foreign investors. By the time of the ‘oil crisis’ of 1973 she was considered one of the top oil economists in the world.Less

Natural Resources and Capital Flight: A Role for Policy?

Rabah Arezki, Gregoire Rota-Graziosi, and Lemma W. Senbet

in Capital Flight from Africa: Causes, Effects, and Policy Issues

This chapter investigates the relationship between natural resources and capital flight through tax avoidance by multinational corporations. It focuses on the spillover effects in terms of tax ... More

This chapter investigates the relationship between natural resources and capital flight through tax avoidance by multinational corporations. It focuses on the spillover effects in terms of tax revenue mobilization and stock market development from the thin capitalization rule, a policy that prevents firm tax avoidance by limiting a firm’s foreign indebtedness. We use data on oil discoveries for a panel of 117 countries during the period 1970–2012. We find that oil discoveries significantly enhance both tax revenue mobilization and stock market development, but only when a thin capitalization rule is in place. These findings can be explained through the limiting impact of the thin capitalization rule on multinational companies’ use of financial transactions among their affiliates or tax havens to transfer profits. The thin capitalization rule may thus help limit the erosion of the domestic tax base and entice multinational corporations to use the domestic financial system.Less