How right is the price?
The trouble with studying for an Economics degree was that every Tom, Dick and Maths geek relegated the perceived syllabus to three years of reading the Economist and watching the Money Programme. They reckoned they understood everything much better than I did, while (they thought) I had no idea how to prove zero (they thought right).
It’s a long time since I studied Economics, but I was reminded by a curious release of the tax authorities earlier this month that nothing has really changed in 40 years.
As everyone (even a Maths geek) knows, one of the pillars of progress in international taxation since the twentieth century started to wind down, is transfer pricing. It isn’t Tax, it isn’t Accounting and it isn’t International Law. It is Economics. And, because it is Economics, people tend to think that, while they wouldn’t dream of trying out brain surgery on their snotty-nosed younger brother (well, some wouldn’t), they have no problem with deciding how to allocate profit between entities in different jurisdictions. Piece of cake. I remember once being asked by a client’s CFO to read through their transfer pricing documentation. Unsurprisingly, it was like a sweater knitted without a pattern. The only thing it was good for was self-publishing as bad fiction on Amazon.
Whatever one’s criticism of transfer pricing methods – and the dismal science ensures there is nothing like the precision of taxation and accounting – the international tax community has largely succeeded in creating a series of mutually agreed rules that, at least, ensure some level of consistency across borders. Thanks to the Base Erosion and Profit Shifting rules of the OECD that have been engulfing the world’s tax systems over the last four years, we tax planners are finding it increasingly difficult to isolate most of the profit of a group on a one-tree desert island in the Pacific with no working lavatories.
Just as barbers ceased to be surgeons, and aristocrats ceased to be relevant, the time came long ago for boardroom philosophers to hang up their “I’m not paying for this rubbish” attitude and go with the flow.
And, in my naivety (and Big 4 experience), that is where I thought we had arrived about a decade ago.
Not so fast. In July the tax authority issued a new ‘International Transaction Declaration’, replacing the previous one. The form is designed to accompany a company’s tax return on its perilous journey through the corridors of the tax authority. While I sometimes think the tax authority has a long way to go to get anything right – and this form is no exception – it is a major advance on its predecessor. While the old form asked the assessee to ‘tell us what you’ve got’ by way of international transactions and provide a vague declaration of compliance with the relevant section of the law, the new form cheekily wants to know which transfer pricing method was used. And no amount of Economist reading or watching the Money Programme is going to provide the answer to that one.
So far so good.
Then the fun started. Within a month (or so) of the form’s appearance, the tax authority put out a statement that, ‘due to an approach’, companies could choose which form to use for 2018, but would be required to adopt the new one for 2019.
What approach? And only one? The mind boggles as to what could have led the tax authorities to agree to pass up on the opportunity to catch all those companies still not using formal transfer pricing methods after all these years.
There will doubtless be many a small-company CFO sipping his Horlicks of an evening next to the fire, holding forth on the state of the world economy, and the universe in general, while he knits away at his last amateur transfer pricing monstrosity.
The big bad wolf is waiting at 2019’s door.