Tax Break

John Fisher, international tax consultant

Archive for the tag “transfer pricing”

How right is the price?

It’s easier to sneak into an exam these days

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.

In the good old days, you could run a multinational group from here

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.

Choose a form, any form

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.

Obama, Join The Circus!

English hero

English hero

I read everything that John Le Carre ever wrote until he, like Paul Simon, went African. His Cold War novels had me chained to the page.  Who could forget the very end of the Quest for Karla Trilogy as Smiley’s People, the last in the series, draws to a close? Spoiler Alert – you may be about to kiss farewell for all eternity to the chance to savour not one, but three truly amazing books. Karla, the Soviet superspy defects across a Berlin foot-bridge  and, as he passes his nemesis George Smiley,  drops the gold lighter that had been a gift to Smiley from his estranged wife.

I had that scene on my mind as I flew in yesterday to Schonefeld Airport in the former East Berlin. The last time I was in Berlin, in the middle of the last decade, Schonefeld was a really ugly Soviet- era airport, with the exclusive El Al terminal guarded by a friendly working tank, its gun trained a little too keenly on the airport approach road. Today it is a really ugly Merkel-era airport without the tank but with Aeroflot planes parked next to their Israeli counterparts – the times they are a-changin’.

I had spent the flight reading the OECD’s latest “Revised Discussion Draft on Transfer Pricing Aspects of Intangibles” with an umpteenth review of the “Action Plan on Base Erosion and Profit Shifting” for dessert. And what could turn a man’s thoughts to espionage more effectively than that?

For those of you who did not lay siege to the OECD Headquarters at the end of July salivating over a copy  of Working Party No 6’s said Revised Discussion Draft,  let me put your minds at rest – you didn’t miss much. It is, to be fair, a highly competent document that deals quite courageously with  identifying intangibles and the surrounding transfer pricing issues – looking very closely at value creation in the functional analysis, establishing that effort trumps legal ownership so that you really cannot ignore “people” when planning your tax. A healthily suspect view of the allocation of risk between group companies is also clear to the naked eye and then there is that long list of examples that aims (but fails) to clarify the meaning of the document.

The less exciting  BEPS

The less exciting BEPS

The Revised Discussion Draft also segues admirably into the “BEPS” – the unfortunate acronym for the Action Plan on Base Erosion and Profit Shifting as opposed to a new tablet for dyspepsia – where International Tax and Transfer Pricing are given the Billy Graham/Pat Robertson  treatment on the moral responsibility of soulless companies to pay lots of tax even if they are not legally required to do so.

Aye, and there’s the rub. The future of the, undoubtedly dysfunctional, international tax system rests on a Kamakaze academic study (circles the target brilliantly but doesn’t tell you how to land) and a poor Bible Belt impersonation from a group of world leaders who are not even capable of saying “Boo!” to Syrian government atrocities.

Perhaps they should have recruited George Smiley. Le Carre fans will recall that Smiley was an unlikely hero. Looking the spitting image of kindly old Alec Guinness (even Le Carre seems to have thought so), he quietly paced the corridors of the Circus (sort-of-Langley to you Americans out there), frequently displaying the moral highground in his own inimitable way as he devised and practiced his craft.

But when it came to Karla – his Public Enemy No 1 –  George went for the oldest and dirtiest trick in the book. He had him blackmailed. That brought him over to the West with his stash of secrets. Smiley didn’t celebrate – it was all too complicated (including that gold lighter) and not cricket – but the job was done.

Now, in case there is any confusion, I am not suggesting a J Edgar Hoover style campaign against MNE CEOs across the Globe nor, for that matter, a J Edgar Hoover style campaign against international tax advisors across the Globe, the latter being far too close to home (however far across the Globe) for my personal comfort.

What IS needed is for a handful of the world’s leading nations (a euphemism for the United States) to quietly steamroller a New World Order using the strong-arm tactics at their disposal – as they did on FATCA. The result will be far from perfect, but it will be a result and inevitably far better than the current proposals most of which will be mired in years of debate and disagreement.

American hero

American hero

I read once that, after the fall of the Berlin Wall, Markus Wolf, the head of the East German Stasi, was asked what he thought of Le Carre’s books, (contrary to widespread rumour, Le Carre has repeatedly denied that he was the model for Karla) . He is reported to have said that he wanted to meet the author in order to put him right on a number of things.  Few would argue that, even if Tinker Tailor Soldier Spy, The Honourable Schoolboy and Smiley’s People were not 100% accurate (who knows?) the world would not have been a poorer place without them.  Obama needs to be persuaded for once not to go for the Excellent (which, in foreign policy terms, he invariably misses by a mile) but just for the plain, imperfect Good. He needs to act. Who knows, he might even get it right?

Starbucks gets roasted

This is what the women remember

It is a tribute to the emotional power of poetry that, when I think of “Four Weddings and a Funeral”, I remember the single funeral rather than the multiple weddings. “He was my North, my South, my East and West” – Matthew’s rendition of  WH Auden’s Funeral Blues as he eulogized Gareth,  lent  pathos to one of the most memorable scenes of British cinema.

Dame Judi Dench, doyenne of the British stage, was somewhat less convincing quoting Tennyson towards the end of her inquisition at the hands of a Parliamentary Committee in the latest James Bond movie: “That which we are, we are”. But then, in fairness, Bond movies are never really remembered for their dialogue (this one even has the barmaid, at the start of a shot, shaking the vodka martini so Bond doesn’t  have to state the obvious). With names like M, Q and 007, far from poetic, the whole experience is not even prosaic  but, rather, algebraic.

On November 12th one of those Parliamentary Committees was in action again (this time for real) and its three hour session did not fall short of Skyfall for entertainment value (and, make no mistake, I loved Skyfall).

The Public Accounts Committee invited representatives of Starbucks, Amazon and Google to assist them in their understanding of the tax paid by multinationals in Britain – or, to be more precise, the lack of it.

“Don’t worry. I never used to pay any tax and the British forgave me”

Amazon and Google were, sensibly, represented by senior Brits who could, at least, bridge the culture gap. Starbucks, evidently thinking that an invitation to appear before the legislature meant tea and cucumber sandwiches with the Queen, sent their global CFO. Poor guy.

The meeting, expertly chaired by Lady Margaret Hodge, an MP  in her late sixties who (WARNING: SPOILER ALERT) would have been a far better replacement for M than Lord Voldemort, started with the usual British niceties – smilingly apologising for the poor layout of the room and thanking the three gentlemen for agreeing to come. As I watched the parliamentary broadcast and the three stooges sitting side by side, all I could think of was the upward crawl at the start of a roller-coaster ride with one kid in the cart who has never done this before. You want to warn him of what is coming next but you are so scared yourself that you can’t.

In age-old British tradition, Lady Hodge “suggested” that they start with specific questions to each company and then move to general issues; a bit like “suggesting” to the condemned man that they start the hanging.  And – surprise, surprise – she started with the American. Needless to say, it was all downhill and hairpin bends from there.

Hapless Mr Bean was not going to have a chance justifying losses in 14 out of the last 15 years when, a year after they made their only profit (2006) of £6 million on a £4 billion turnover, the UK CEO was promoted to a senior role in the US HQ due to his great performance. “We are not accusing you of being illegal, we are accusing you of being immoral.”  ” You are either running the business very badly or there is some sort of fiddle going on”.  Apart from trying to invoke the lunacy of accounting differences between the US and Britain, about the best the CFO could come up with was “profitability challenges” which is a beautiful term right up there with “transparent wall technician” as a euphemism for  window cleaner.

Google and Amazon, protected to varying degrees by the – impossible to fathom – internet aspects of their business and the fact that they were British and therefore knew how to handle sarcasm, fared somewhat better. However, when the Google CEO asked Lady Hodge to clarify that a series of quotes of senior politicians expressing disgust at the lack of tax paid were not aimed specifically at those around the table, she replied that, no, they were indeed aimed directly at them.

Meanwhile, a widespread populist movement to boycott Starbucks has got underway with some branches requiring police protection. An article in the Guardian, a centre-left quality newspaper, by the improbably named Jemima Kiss put it all down to a “practice known as Transfer Pricing” which sounds like some shady underworld trick. Are Transfer Pricing practitioners now to be sought out and lynched from the nearest palm tree?

The whole thing is a load of populist codswallop. Trying to pin legal and transparent transfer pricing practices (and in that, Ms Kiss was spot-on with  the root of the problem) on the question of morality defies belief. It is not that morality has no place in the tax world – it can be strongly argued that the technically legitimate planning of individuals and companies to avoid tax in their countries of residence, where they and their fellow residents and citizens benefit from public expenditure, has elements of  morality and conscience. But when it comes to international taxation, it simply has to be down to the legislatures of individual countries and international organizations like the OECD and UN to establish tax rules that ensure fairness as defined by them.

How is the Tax Director of a multinational supposed to decide his or her transfer pricing policy on the basis of morality? After completing an analysis of assets, functions and risks, even if he would send each Transfer Pricing Study to the local Priest, Rabbi, Imam or Witch Doctor for a blessing – who says that the moral authorities of the other countries affected would not take a different view. And what about wonky-minded States who could play their Joker and roll out Nietzsche’s Übermensch to justify steamrolling the rest?

In 2010 the OECD announced the commencement of a project on the transfer pricing aspects of intangibles. A scoping paper was published on the OECD website for public comment. In the interim, three public consultations have been held with interested parties. The writing on the wall suggests that R&D cost-plus operations in the future will require a much higher “plus” justifying the enormous human input and, also, that the parking of IP on desert islands will only be acceptable if a significant number of the IP company’s employees on said island are first sent to Harvard or Oxford to study for an MBA or PhD. Furthermore, individual countries need to ramp up their CFC legislation to make sure they are catching the right foreign income even when, as is the the case with the vast majority of OECD countries,  they have adopted a system of territorial taxation.

Pure Poetry

Poetry may not be Skyfall’s strongpoint but there is one scene that, for people of a particular generation (mine),  had all the immediate emotional force of a great poem (WARNING: SPOILER ALERT). Fleeing certain death with the aged M, Bond swaps her state-of-the-art Jaguar for the legendary Aston Martin DB5 used in Goldfinger almost 50 years ago. As aerial shots showed the car wending its way along country roads to the Bond ancestral home, for a brief moment sitting in the darkened cinema I found myself  watching the movie through the eyes of a youth (me)  dreaming of an exotic Bond-like future. The rest (of course) is boring beancounting history. But I wonder what my two teenage sons  sitting next to me were thinking?

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