Should Apple Pay $13 billion Penalty to EU?: Base Erosion and Profit Shifting (BEPS) and Transfer Pricing in MNCs

Transcription

1 Should Apple Pay $13 billion Penalty to EU?: Base Erosion and Profit Shifting (BEPS) and Transfer Pricing in MNCs Richard Bolwijn, Chief, Business Facilitation, UNCTAD Sea-Jin Chang, Lim Kim San Chair Professor at National University of Singapore Lorraine Eden, Gina and Anthony Bahr '91 Professorship in Business at Texas A&M University Steef Huibregtse, Founder and CEO, Transfer Pricing Associates 1

2 2

3 3

4 4

5 ABUSIVE TRANSFER PRICING AND INCOME SHIFTING: I. Government Perspective II. MNE Perspective III. Research Perspective Sea-Jin Chang & Lorraine Eden 5

6 I. Government Perspective: TP Is Abusive MNEs are large economic actors in the global economy MNE value added activities = 11 % world GDP MNE foreign affiliate exports are 1/3 world exports Related party trade is nearly half US exports and 30% of US imports. For all OECD countries: 8-15%. Transfer pricing affects a country s balance of payments and economic development. Transfer Pricing is an important economic issue. Abusive transfer pricing attracts attentions of governments and invites regulations Arm s length price is a global norm 6

7 Punishing Abusive Transfer Pricing: Penalties 7

8 II. The MNE Perspective: A Balancing Act 1. Internal Motivations for TPM 1. Efficient resource allocation prices as signals 2. Better tracking of intrafirm flows 3. Performance evaluation of affiliate managers 2. External Motivations for TPM 1. Corporate income tax rates 2. Ad valorem tariffs 3. Foreign exchange controls 4. Minority joint venture requirements 5. Other regulations 3. MNEs set transfer prices by balancing internal and external motivations. If we take a stakeholder perspective, transfer pricing can be legal but immoral. 8

9 What the MNE Sees as a Problem: Transfer Pricing Risk TPM occurs when the profit maximizing transfer price differs from the arm s length price set by the regulatory authority..but 1. There is no single arm s length price but rather a range of prices. The transfer price could lie inside or outside the range. 2. Each government uses its own methods to determine its own arm s length range so methods and arm s length ranges differ. Transfer pricing is based on the MNE s guesstimate of each government s range(s) of acceptable transfer prices and the MNE s ability to document and defense these prices. How does the MNE know when its transfer pricing is abusive? Multiple regulators with differing rules create huge tax and penalty risks for the MNE. 9

10 III. Research Perspective: Internalization Internalization enables the MNE to profit from integration and arbitrage opportunities due to: 1. Natural market imperfections a. Missing and imperfect markets (e.g. technology) b. Transaction costs of market making 2. Structural market imperfections a. Structural market barriers b. Government regulations (tax differentials, tariffs, non-tariff barriers, FX controls) Empirical evidence of transfer pricing and income shifting is limited and indirect, due to lack of actual transaction data. 10

11 Empirical Estimates: Income Shifting Studies Marion B. Stewart (1986), U.S. Tax Policy, Intrafirm Transfers, and the Allocative Efficiency of Transnational Corporations, Public Finance/Finances Publiques, 41: Harry Grubert and John Mutti (1991), Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making, Review of Economics and Statistics, 73: John Jacob (1996), Taxes and Transfer Pricing: Income Shifting and the Volume of Intrafirm Transfers, Journal of Accounting Research, 34: Celine Azemar and Gregory Corocos (2009), Multinational Firms Heterogeneity in Tax Responsiveness: The Role of Transfer Pricing, The World Economy, 32,

12 Empirical Evidence: Trade Mispricing Studies Sanjaya Lall (1973), Transfer Pricing by Multinational Manufacturing Firms, Oxford Bulletin of Economics and Statistics, 35: Jean Thomas Bernard and Robert J. Weiner (1990), Multinational Corporations, Transfer Prices, and Taxes: Evidence from the U.S. Petroleum Industry, in Assaf Razin and Joel Slemrod (eds.) Taxation in the Global Economy, Chicago: University of Chicago Press: Deborah L. Swenson (2001), Tax Reforms and Evidence of Transfer Pricing, National Tax Journal, 54: 7 26 Eric J. Bartelsman and Roel M. W. J. Beetsma (2003), Why pay more? Corporate tax avoidance through transfer pricing in OECD countries, Journal of Public Economics, 87: Kimberly A. Clausing (2003), Tax motivated transfer pricing and US intrafirm trade prices, Journal of Public Economics, 87: Lorraine Eden and Peter Rodriguez (2004), How Weak Are the Signals? International Price Indices and Multinational Enterprises, Journal of International Business Studies, 35, Michael J. Ferrantino, Xuepeng Lui and Zhi Wang (2012), Evasion behaviors of exporters and importers: Evidence from the U.S. China trade data discrepancy, Journal of International Economics, 86:

13 Empirical Evidence: Financial Studies Agnes W.Y. Lo, Raymond M.K. Wong and Michael Firth (2010), Can Corporate Governance Deter Management from Manipulating Earnings? Evidence from Related-Party Sales Transactions in China, Journal of Corporate Finance, 16, Lorraine Eden, Luis F. Juarez Valdez and Dan Li (2005), Talk softly but carry a big stick: transfer pricing penalties and the market valuation of Japanese multinationals in the United States, Journal of International Business Studies, 36: Grant Richardson, Grantley Taylor and Roman Lanis (2013), Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms, Journal of Contemporary Accounting & Economics, 9:

14 Next Research Directions? Current Research Modeling and estimating impacts of tax rule changes on MNE strategies and firm performance, especially BEPS regulatory changes Modeling and estimating impacts of MNE tax strategies on tax payments and firm performance (Global value chains, IP migration, cash pooling, cost sharing arrangements) Better techniques for estimating abusive transfer pricing? New Directions Transfer pricing in the digital economy Looking at Tax Payments through a CSR Lens Transfer Pricing vs. General Trade Mispricing Studies Country by Country Reporting (CbCR) - data gold mine? 14

15 "Base Erosion and Profit Shifting (BEPS) and Transfer Pricing in MNCs: Policy Considerations and Practices" Richard Bolwijn Dr Sea-Jin Chang Steef Huibregtse 26 October 2016 Taking control of the future tpa-global.com

16 Tax policy and tax boundaries USA Special regime Japan Italy low growth > 30% - 40% Corporate Income Tax rates (Source: IBFD) EU after BEPS Normalized tax regime (under development) No normalized tax regime <15% Tax revenue to GDP ratio (Source: IMF, UNDP) 2 tpa-global.com

17 Latest on BEPS Summary and highlights of the G20/OECD BEPS Project documents. o Reports published: Action 1 Action 2 Action 3 Action 4 Action 5 Action 6 Action 7 Action 8, 9 & 10 Action 10 Action 10 Action 10 Action 11 Action 12 Action 13 Action 14 Action 15 Tax Challenges of the Digital Economy Hybrid Mismatch Arrangements Designing Effective Controlled Foreign Company Rules Interest Deductions and other Financial Payments Harmful Tax Practices Treaty Abuse and Treaty Shopping Prevent the Artificial Avoidance of PE Status Transfer Pricing Guidelines, including Risk, Re-characterisation and Special Measures Profit Splits Cross-border Commodity Transactions Low Value-adding Services Measuring and Monitoring BEPS Mandatory Disclosure Rules TP Documentation and CbC Make Dispute Resolution Mechanisms more Effective Multilateral Instrument How OECD works on BEPS? o Individual countries start issuing BEPS measures (e.g. Spain, UK, Australia) 3 tpa-global.com

18 Latest on BEPS, continued BEPS sensitivity on tax and transfer pricing preferential regimes? o Examples: The Netherlands, Ireland, Luxemburg, Switzerland, Malta Hong Kong, Mauritius, Singapore BVI, Bermuda o Four waves of challenges: 1. UK Congress: Amazon, Google & Starbucks 2. US Congress: CEO of Apple 3. G20/OECD BEPS Project 4. EU Commission: Starbucks/NL, Apple/Ireland, Fiat & Amazon/Luxemburg, i.e. action also coincides with Lux Leaks / Panama Leaks 4 tpa-global.com

19 Latest on BEPS / Examples Example: Apple case The reduction of the effective tax burden, theoretically 1. IrelandCo receives royalties assumed 850, US ParentCo Assumption: 0.5% remains in Ireland based on an APA -4, The Netherlands receives royalties 845,750 Assumption: 0.5% is paid in The Netherlands -4, Net to Ireland/Bermuda 841,521 Cost sharing agreement 3. NL BV Local taxes Royalty in 845,750 Royalty out -841,500 Net income 4,250 Local CIT -1, Drop taxable basis to 19,000 / 1,000,000 *100% = 1.9% 2. IrelandCo Royalty 1 850, EU Sales EU Sales Co s Co s = 100% ownership 4. Ireland/ Bermuda Local taxes Royalty in 841,500 Local CIT -0,000 Local taxes Royalty in 850,000 Royalty out -845,750 Net income 4,250 Local CIT -1,063 Local taxes Gross sales 1,000,000 Royalties -850,000 Net sales 150,000 Other costs -139,500 EBIT 10,500 Local CIT (25%) -2,625 Source: International Tax Review 5 tpa-global.com

20 6 tpa-global.com

21 Views on the Apple Case 1. The 841,500 (royalty income) at the level of Ireland/ Bermuda will be taxed upon repatriation to the USA. 2. The 841,500 (royalty income) at the level of Ireland/ Bermuda should have been taxed in various EU countries. 3. The EU state-aid assessment protects all taxpayers against individual taxpayers receiving a preferential tax treatment (selective economic benefit), i.e. does not address the statements made under 1 and 2 above. 4. The EU should introduce a special tax on digital economy trade, since companies such as Apple generate taxable profits in Europe without having to build a traditional significant presence, to strengthen the EU taxable base. 7 tpa-global.com

22 Q&A 8 tpa-global.com

23 Steef Huibregtse CEO and Managing Partner Transfer Pricing Associates +31 (0) TPA Global provides international businesses with integrated and value-added solutions in improving financial performance, operational efficiency, strategic development and talent coaching through a cross-border and crossdiscipline team of professionals which identifies the right solutions for customers and targets; efficient and streamlined advisory and implementation processes which cut through operational complexities across functions and borders; and superior customer service and support which proactively anticipate the evolving needs of the clients. H.J.E. Wenckebachweg AS Amsterdam. The Netherlands. +31 (0) tpa-global.com The views expressed and the information provided in this material are of general nature and is not intended to address the circumstances of any particular individual or entity. The above content should neither be regarded as comprehensive nor sufficient for making decisions. No one should act on the information or views provided in this publication without appropriate professional advise. It should be noted that no assurance is given for any loss arising from any actions taken or to be taken or not taken by anyone based on this publication Transfer Pricing Associates Holding B.V. All Rights Reserved. Taking control of the future tpa-global.com

24 BEPS in MNEs and cross-border investment Insights from the World Investment Report Richard Bolwijn Investment and Enterprise Division UNCTAD October 2016

25 At least 30% of FDI is routed through offshore hubs Non-OFC inward investment stocks, by type of investor Vertical view of the Offshore Investment Matrix (Per cent) By some measures, two-thirds of international investment is either present in or has been routed through offshore hubs 2

26 A higher share of offshore hub investment in a country s inward FDI leads to lower reported rates of return 3

27 More than 40 per cent of foreign affiliates worldwide have multiple "passports" Source: UNCTAD.

28 Ownership complexity in the Top 100 MNEs

29 Foreign affiliate fiscal contribution in developing economies: ~$730 billion Government revenues contributed by foreign affiliates of MNEs Share of government revenues, developing countries,

30 Global policy focus in the coming years: Investment Facilitation why? Productive investment gap SDG investment gap Systemic policy gap Stagnating FDI growth: flows still 10% below pre-crisis peak, and further decline expected in 2016 Three-quarters of 2015 growth due to corporate restructuring (including inversions) and M&As SDGs face an annual investment gap of $2.5 trillion In key SDG-sectors: agriculture, renewable energy, water and sanitation, health and education, but also in general productive capacity! Only 23% of national investment policy measures over the last 5 years addressed facilitation In over 90% of International Investment Agreements facilitation is absent or weak

31 Thank You! Visit UNCTAD websites: Richard Bolwijn UNCTAD Investment and Enterprise Division