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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Critical Perspectives on Accounting, Volume 21, Issue 4, April 2010, Pages 342–356
In conventional accounting literature, ‘transfer pricing’ is portrayed as a technique for optimal allocation of costs and revenues among divisions, subsidiaries and joint ventures within a group of related entities. Such representations of transfer pricing simultaneously acknowledge and occlude how it is deeply implicated in processes of wealth retentiveness that enable companies to avoid taxes and facilitate the flight of capital. A purely technical conception of transfer pricing calculations abstracts them from the politico-economic contexts of their development and use. The context is the modern corporation in an era of globalized trade and its relationship to state tax authorities, shareholders and other possible stakeholders. Transfer pricing practices are responsive to opportunities for determining values in ways that are consequential for enhancing private gains, and thereby contributing to relative social impoverishment, by avoiding the payment of public taxes. Evidence is provided by examining some of the transfer prices practices used by corporations to avoid taxes in developing and developed economies.
Transfer pricing1 is of increasing importance to corporations as in a globalized economy their operations extend to countries with diverse taxation regimes and regulatory capacities. The pursuit of profits, cash flows, marketing goals, economies of scale and competitive advantage through divisionalization, joint ventures, subsidiaries and affiliates necessitates estimations of costs to measure performance and taxable profits. In such an environment corporations need to develop processes for allocating costs and overheads and design strategies for estimating transfer prices for goods and services. Since costs and overhead allocation mechanisms are highly subjective corporations enjoy considerable discretion in allocating them to particular products/services and geographical jurisdictions. Such discretion can enable them to minimise taxes and thereby swell profits by ensuring that, wherever possible, most profits are located in low-tax or low risk jurisdictions. Experts acknowledge that transfer pricing can enable companies to avoid double taxation, but “it is also open to abuse. It can be used to shift profits artificially from a high- to a low-tax jurisdiction, by maximising expenses in the former and income in the latter” (PricewaterhouseCoopers, 2009, p. 15). A former Senior Fellow of the Brookings Institution has argued that “transfer pricing is used by virtually every multinational corporation to shift profits at will around the globe” (Baker, 2005, p. 30). The mobilization of transfer pricing for tax avoidance,2 and sometimes evasion, is largely invisible to the public and is difficult and expensive for regulatory authorities to detect. There is indeed a complex game involving numerous actors—corporations, accountants, lawyers, consultants, governments, tax authorities, multinational agencies (e.g. OECD), NGOs and so on—engaged in establishing and revising the rules of the game with regard to which method(s) of calculating prices is acceptable, and also developing and detecting ways of manipulating, escaping or subverting these rules and methods. As means of enhancing divisional, segmental, product and global profits, the unimpeded use of transfer pricing matters to stock markets as earnings, dividends, share prices and return on capital are all affected. It also matters to company executives because their financial rewards are frequently linked to corporate earnings. Transfer pricing practices matter to the state because they affect the taxes that it can levy upon corporate profits to finance public goods and thereby secure legitimacy. Business advisers claim that “transfer pricing continues to be, and will remain, the most important international tax issue facing MNEs” (Ernst & Young, 2006, p. 5). This is entirely plausible because transfer pricing enables corporations to minimize tax payments by enabling capital to be exported to more favourable locations. It has become a major growth area for international accountancy firms which market “creative and practical solutions for … transfer pricing needs” (Ernst & Young, 2005, p. 68). Given the importance of transfer pricing in relocating corporate profits, facilitating tax avoidance and the flight of capital, and its implications for the distribution of wealth and public goods (US GAO, 1995, Armstrong, 1998, Oyelere and Emmanuel, 1998, Gramlich and Wheeler, 2003, Baker, 2005 and UK AAPPG, 2006), the Head of the US Inland Revenue Service (IRS) has described transfer pricing as “one of [its] most significant challenges” (The Times, 12 September 2006). Arguably, there is significantly more to transfer pricing than refinements of techniques and a study of US corporations concluded that “transfer pricing may be playing an important role in aggregate national accounting, potentially reducing the reported value of exports and the current account (and thus GDP). The response of the price wedge to tax rates indicates that tax minimization may be an important part of transfer pricing decisions with consequences for the level of corporate tax revenue and strategic responses to changes in the tax code” (Bernard et al., 2006, pp. 19–20). With the intensification of globalization, nation-states have become concerned about the malleability of ‘transfer prices’ and their role in avoiding taxes and knock on effect for public legitimacy and citizens’ life-chances. Some have taken considerable powers to challenge corporate calculations. For example, the US tax authorities have considerable powers under Section 482 of the Internal Revenue Code to allocate income, deductions, credits, or other allowances between or among controlled entities if that allocation is considered to be necessary to prevent evasion of taxes. Nation-states and transnational agencies have also developed joint frameworks, treaties and international guidelines on the formulation of transfer prices (OECD, 1979, OECD, 2009, European Commission, 2004 and Eden et al., 2001). Faced with a squeeze on budgets and concerns about social and political stability some states are showing greater interest in scrutinising the effect of transfer pricing on corporate taxes (Hansard, UK House of Commons Debates, 6 Jul 2006, col. 1258; US Government Accountability Office, 2004). Some have sought to curb abuses by imposing higher financial penalties and by beefing up audit and enforcement requirements (Williamson et al., 2001 and Eden et al., 2005). Corporate executives acknowledge that “the likelihood of being challenged by tax authorities on their transfer pricing [practices] was increasing” (Henderson Global Investors, 2005a, p. 4) and a number of companies are facing lawsuits from the tax authorities and have been persuaded to make financial settlements. The UK authorities made transfer pricing adjustment to 1724 tax computations in 2005–2006 and [unknown] penalties were agreed in five cases (Hansard, UK House of Commons Debates, 6 Jul 2006, col. 1258). For the period 2003–2007, transfer pricing adjustments resulted in additional tax revenues of £1134 million (Hansard, UK House of Commons Debates, 10 November 2008, col. 938) and a further £2114 million was raised from adjustments for the period 2007–2009 (Hansard, UK House of Commons Debates, 11 January 2010, col. 781). Transfer pricing audits have enabled the Australian tax authorities to raise more than A$2.5 billion in additional tax revenue in the 5 years to 2005 (Sydney Morning Herald, 31 August 2006). In response to the uncertainty and risk to which corporations are exposed by transfer pricing, in almost all countries, there are possibilities of avoiding protracted disputes with tax authorities through ‘Advance Pricing Agreements’ (APA). These permit corporations and domestic and foreign tax authorities to agree on transfer pricing methods in advance of filing a tax return and thus avoiding considerable uncertainties and possible lawsuits (OECD, 2001, OECD, 2009 and US IRS, 2007). For confidentiality reasons, tax authorities are unwilling to publish details, but some available evidence suggests that relatively few agreements (For UK evidence see Appendix 1) are entered into (Williamson et al., 2001). In turn, this suggests that corporations are inclined to regard the area of transfer pricing as sufficiently complex, fluid and still weakly regulated terrain where detection is low and transgression is calculated as an acceptable business risk.3 Transfer pricing is a well-established topic in accounting textbooks, but the use of transfer pricing4 to avoid taxes and shift capital has attracted little sustained interest (Sikka et al., 2007). The bourgeoning corporate social responsibility literature is largely silent on the role of transfer pricing in tax avoidance and the flight of capital (Christensen and Murphy, 2004). A considerable body of literature draws attention to the economic theories underlying transfer pricing (e.g. Hirshleifer, 1956, Abdel-Khalik and Lusk, 1974 and Plasschaert, 1994), organizational processes (for example, Cools et al., 2008) and income shifting tendencies (for example, Harris, 1993, Klassen et al., 1993, Jacob, 1996, Oyelere and Emmanuel, 1998, Emmanuel, 1999 and Smith, 2002), but comparatively little attention is paid to what might be termed the ‘politics’ of transfer pricing. There are few illustrations of the pricing strategies used by companies. This paper seeks to draw attention to the dark side of transfer pricing by examining its role in relation to struggles over the distribution of economic surplus. Its purpose is not to advance an alternative theory of transfer pricing, or offer interpretation of complex legislation and the case law relating to it, or even to develop some new conceptual categories for its analysis. Its more modest ambition is to intensify attention to a key area of accounting practice and policy that is largely invisible to students of accounting and of seemingly low priority to the media, politicians, regulators and corporate critics. It relies upon publicly available information to provide illustrations of transfer pricing practices. The paper is organised in three further sections. The next section locates transfer pricing decisions within the dynamics of capitalism to develop a framework for understanding its role in conflicts over resource allocation. The second section presents some evidence to show that transfer pricing practices are implicated in tax avoidance and the flight of capital, both in developing and developed economies. A third and final section summarises the paper and attends to the broader social relevance of transfer pricing policies.
نتیجه گیری انگلیسی
This paper has sought to draw attention to the role of transfer pricing in facilitating tax avoidance. By collecting together some of the scattered evidence of the nature and extent of scope of transfer pricing in relation to tax avoidance it has sought to give greater visibility to the role of transfer pricing in transferring wealth. This paper has endeavoured to show how transfer pricing is not just an accounting technique, but also a method of resource allocation and avoidance of taxes that affects distribution of income, wealth, risks and quality of life. By shedding some light upon the dark side of transfer pricing, our intention has been to stimulate a closer and more critical consideration of the ramifications of transfer pricing practices, and thereby encourage more informed consideration of how these might be regulated in a more socially attentive and responsible manner. Recent years have seen considerable decline in the headline rates of corporation tax (KPMG, 2009a and KPMG, 2009b), but this does not appear to have checked the corporate desire to avoid taxes. In more advanced economies, despite record profits, the tax revenues from corporate taxes as a percentage of the GDP and effective tax rates have declined, and transfer pricing practices may provide a plausible explanation for this decline (Mitchell and Sikka, 2005 and KPMG, 2009b). As rational economic actors companies continue to structure their transactions to exploit tax differentials in diverse geographical jurisdictions and some observers claim that often “intra-company pricing crosses the line from tax avoidance into outright tax evasion” (Forbes, 28 August 2009). The comparatively well-off states are responding with aggressive audits and legal action. The US tax authorities recruited 1200 additional staff in 2009 and a further 800 in 2010 to scrutinise transfer prices (CFO Magazine, 1 September 200934). In contrast, many developing countries lack the resources to deploy greater manpower and hence are not in a position to adequately scrutinise the transfer pricing games. The evidence cited in this paper suggests that the traditional representation of transfer pricing as ‘neutral’ (OECD, 1979) or as having “no direct effect on the entire company's reported profit” (Garrison et al., 2005, p. 654) is problematic or, at best, aspirational, as in practice, it can enable companies to report higher earnings to appease stock markets and maximize executive remuneration, but the loss of tax revenues curtails the ability of the state to provide public goods and alleviate poverty. Faced with corporate resistance some states may assign higher rates of taxes to wages, consumption, savings and less mobile capital, which in turn can breed resentment and undermine the social legitimacy of the state. Thus transfer pricing is at the heart of the debates about legitimacy of the state, social responsibility and accountability of corporations. Globalization has encouraged convergence around the arm's length principle, but relatively few corporations dominate global trade and independent prices for intermediate goods are not easy to formulate. This is compounded by the routing of financial transactions through subsidiaries and affiliates in offshore tax havens, which may have little economic substance. Companies are also placing intellectual property and intangible assets in tax havens and subsequently charging royalties and rents to shift profits. As low/no tax jurisdictions, tax havens have little direct interest in monitoring transfer pricing practices to ensure that they comply with the arm's length principle. The emergence of offshore tax havens poses new challenges to conventional ideas about transfer pricing and merits a closer look. Such scrutiny could be aided by corporate disclosures, but corporate financial reports rarely provide any meaningful information about transfer pricing practices (Tang and Zhao, 2001) even though it could affect estimates of future cash flows, risks, returns and regulatory action. Accounting standard setters (e.g. UK ASB, 1995 and IASB, 2003), dominated by accounting firms and large corporations, do not require companies to provide information about transfer pricing practices. Apparently fearful of being portrayed as anti-business the UK government has also resisted pressures to introduce legislation requiring companies to publish details of their transfer pricing policies (Hansard, UK House of Commons Debates, 14 February 2006, col. 1862) or tax calculations (Hansard, UK House of Commons Debates, 15 February 2006, col. 2083). In this vacuum, NGOs have taken-up the challenge of drafting alternative accounting standards and demanding that companies publish information to show their profits, assets, liabilities, tax payments and employees for each country of their operation and disclose their transfer pricing practices (AABA, 2003 and Global Witness, 2005). International trade has the capacity to provide increased investment, employment and economic development. However, it can also impoverish societies through tax avoidance and capital flight. The darker side of transfer pricing has attracted the attention of NGOs (for example, Global Witness, 2005, Action Aid, 2009, Christian-Aid, 2008 and Christian-Aid, 2009), and non-accounting literatures (for example, Baker, 2005, Brittain-Catlin, 2005 and Kar and Cartwright-Smith, 2008) and have linked transfer pricing practices with tax avoidance, capital flight and poverty. They have even been joined in this by some institutional investors (Henderson Global Investors, 2005a and Henderson Global Investors, 2005b). In contrast, the role of transfer pricing in tax avoidance, capital flight and its social implications receives little attention in the accounting literature. Indeed, in the accounting literature, there is a deafening silence on the involvement of accounting techniques in widening social inequalities and limiting the resources available for public goods. Seemingly, transfer pricing is taught without any consideration of its social and political context and its capacity to transfer wealth through tax avoidance (Tippett and Wright, 2006 and Sikka et al., 2007). In contrast, we have placed transfer pricing at the heart of conflicts over the allocation of resources that involve corporations, stock markets, company executives, business advisers and the state. Transfer pricing practices, we have argued, merit close attention because they articulate competing claims on economic surpluses in the shape of corporate earnings, rates of return, dividends, executive rewards, taxes, social welfare rights and the ability of states to provide public goods. Some of the literature urges nation-states to eliminate tax differentials in the hope that this would check the tendency to shift profits to low-tax jurisdictions (Borkowski, 1997). Such a prescription would lead to a race-to-the-bottom where global corporations would pay little or no tax and the burdens would be shifted onto less mobile capital, labour, consumption and savings. The proposal neglects other avenues of reform and pressures from domestic politics which have persuaded states to secure social legitimacy and stability by underwriting particular social settlements, welfare rights and obligations. Admittedly, globalization has added complexities to attempts to compute local costs as “arm's length prices are often difficult to establish for many intermediate goods and services … arm's length standard has become administratively unworkable in its complexity. As a result, the arm's length standard rarely provides useful guidance regarding economic value” (Avi-Yonah and Clausing, 2007, p. 7). In response, some US states have implemented “formulary apportionment” where companies are taxed on the basis of their economic activity and income within a particular geographic jurisdiction rather than arbitrary allocation of costs (Picciotto, 1992a, Mintz, 1998 and Avi-Yonah and Clausing, 2007). Such models could be applied within emerging super states, such as the European Union, but cannot easily address the underlying cause of transfer pricing problems, i.e. the systemic conflict between transnational corporations, state, markets and a variety of diverse stakeholders over the allocation of economic surpluses. The use of transfer prices to shift capital and avoid taxes also poses some fundamental questions about the quality of national economic statistics. Most governments seek to steer the economy by using data on imports, exports, national income, corporate profitability, balance of payments and terms of trade. However, the quality of such data is problematized by corporate transfer pricing policies. By routing paper transactions through tax havens or no/low-tax jurisdictions companies are not necessarily engaging in any new production of goods or services, but such practices significantly change the economic statistics used by governments to manage local economies. Overall, we would suggest that research into politics of transfer pricing presents considerable opportunities for illuminating capital flight, tax avoidance, complexities of globalization and the deepening crisis of the state. Such a research agenda would place transfer pricing in broader social, political and organizational contexts and show how with the support of professionals (e.g. accountants, lawyers) accounting techniques are mobilized to allocate and retain wealth. The professional experts offer technical services, tax planning and advice on compliance with the rules, but as profit seeking actors they also have an interest in offering novel interpretations of rules and marketing transfer pricing schemes to enable companies to avoid taxes. The use of transfer pricing to avoid taxes poses challenges to professional and corporate claims of acting as socially responsible organizations. It is difficult to reconcile claims of social responsibility with everyday corporate routines and processes that divert tax payments away from society to shareholders. Such conflicts are a reminder of the pivotal role of professionals and accounting techniques in shaping distribution of income and wealth. It would be useful to examine daily corporate routines and processes that normalize tax avoidance aspects of transfer processing and deprive democratically elected governments of vital revenues for social development. The tendency to link executive rewards to corporate earnings is likely to encourage search for complex transfer pricing schemes and tax avoidance strategies. Such practices may enrich a few people but also deprive millions of people of clean water, sanitation, education, healthcare, pensions, security, transport and public goods. Transfer pricing also provides a lens for studying the complex and contradictory relationship between the state and corporations. The state is the ultimate guarantor of capitalism and supports capitalist enterprises not only by bailing out distressed enterprises (e.g. banks) but by also providing social infrastructure, security, legal system and social stability conducive to the production of economic surpluses. Such activities can only be financed through collection of adequate tax revenues, but the net effect of many corporate transfer pricing strategies is to deprive the state of the tax revenues and undermine its ability to provide public goods and an environment conducive to smooth accumulation of economic surpluses. Thus the politics of transfer pricing draw attention to the complex and contradictory role of the state and corporations in the recurring crisis of capitalism.