The prices set for these internal transfers are not verifiable and are not governed by market principles. This is the greatest irony of free market economics: a substantial proportion of world trade (that occurring within Mans) is not governed by prices set by the market! The price set for a transaction within a business group (controlled transactions), i. E. Between the parent company and an affiliate or between related entities within he business group, is known as the transfer price. Transfer pricing is one of the most important tax issues faced by Mans (UNCLAD 1999). The problem addressed by the transfer pricing rules is the absence of market friction in transactions between controlled persons and the resulting need to verify prices in such transactions for income tax purposes and, if necessary, to adjust for that absence” (Reasonable 2005). Tax is the price of civilization. Tax havens are the price of globalization. They are the bulging pockets of the market economy. The dominant feature of the present eave of globalization is the global movements of capital and information, both brought about by information technology. Mobility of capital, low taxes and secrecy coupled with restriction on the free flow of information is the reason for the mushrooming of tax havens. Harnessing resources for the common good is the task of governments, and it is possible only if taxes are collected.
Tax base flight poses a challenge to most nations, irrespective of their stages of development. Options available to countries for preventing tax-motivated transfer pricing are limited in the globalizes world. There is an urgent need to augment policy instruments to keep the tax base intact and also to create a ‘level playing field’. The objective of this study is to evaluate the ways and means available to governments to prevent tax-motivated transfer pricing. Juxtaposed with transfer pricing, tax havens emerge as part of the problem for tax administration. As transfer pricing is closely linked to low-tax countries, the magnitude and impact of tax havens is analyses in the second part of this paper.
The third part gives an analysis of various motives for the manipulation of transfer prices, the instruments used by Mans to carry it out German Development Institute Coupled with the existence of tax havens, these intra-firm transactions provide a facade of legality for the shifting of profit from one jurisdiction to another, low-tax jurisdiction as a normal course of business events. To illustrate the magnitude of the problem and the ingenuity of the actors, it suffices to mention here Rupert Morocco’s News Corporation, which has earned profits of US$ 2. 3 billion in Britain since 1987 but has paid no corporation tax there (Economist 2000). The much discussed tax investigation in February 2008 into the financial affairs of Klaus Summarize, the then chief executive of Deutsche Post in Germany, clearly shows how tax-dodging schemes in Liechtenstein, a tax haven, help the tax evaders. The issue of international transfer pricing is closely linked to tax havens.
Mans have no incentive to manipulate transfer prices if both home and host countries have similar tax structures. Apart from the tax differences between two normal countries, the existence of low-tax jurisdictions, coupled with mobile capital, complicates the issue of tax compliance. And its impact on economies. The fourth part analyses the options available or stopping transfer pricing with income shifting as its objective, focusing on the advantages and disadvantages of separate accounting and formula apportionment methods. The fifth part briefly examines the efforts of international tax regimes to plug the loopholes and makes a number of policy recommendations. The initiatives taken by the (320 are considered.
The major policy recommendation is that a multinational agency should eventually be established to calculate the tax bases of Mans, with an organization set up in the short run to collect and share actionable information on NC activities across he globe. The existence of tax havens has left other countries with limited options as regards tax rates and tax regimes. The difference between portfolio investment (Pl) and foreign direct investment (FED) needs to be taken into account while analyzing the FED and taxation. Portfolio capital is much more mobile than FED. The treatment of capital gains, the basis on which they are taxed (accrual or realization) and the tax rates applied (income tax or corporation tax rates or a different tax rate altogether) are the main differences between countries that give rise to tax arbitrage opportunities.
The complex derivative instruments available in the portfolio investment market allow investors to arrange their investments in such a way that they are outside any country tax structure. Pl is much more volatile and highly sensitive to tax rates (Shoulder 2001). Apart from the fear of the flight of portfolio capital, the low-tax jurisdictions have caused tax competition among countries wanting to attract FED. There is ample empirical evidence to show that countries compete with each other on tax rates (Devourer / Lockwood / Reardon 2008). Tax competition is not only harmful to public finance, but also likely to harm local communities and the environment (Gillian 2006).
Tax differences cause income to shift from one country to another. Taking the manufacturing sector as their basis, Barbells Four key factors are used to determine whether a jurisdiction is a tax haven: 1 . Whether it imposes no or only nominal taxes; 2. Whether there is a lack of transparency; 3. Whether there are laws or administrative practices that prevent the effective exchange with other governments of information for tax purposes on taxpayers benefiting from no or nominal taxation; 4. Whether or not it is required that the activity be substantial (COED 1998). See Appendix 1. Tax havens present tax evaders with opportunities and incentives.
While the definition of a tax haven varies, the most common features of these territories are low taxes on foreign business activities and unwillingness to share information with other tax jurisdictions. Organization for Economic Co-operation and Development (COED 1998) provides a useful definition of a tax haven as a jurisdiction that imposes no or only nominal taxes itself and offers itself as a place for non-residents to escape tax payments in their country of residence. On the basis of various parameters, 59 countries are classified as tax havens (Lorraine / Cuddle 2005; Thermally / Hines Jar. 2007). 2 Many of these territories are very small in geographical and population terms.
They have fiscal autonomy even if they are not fully sovereign nations recognized by the United Nations. As they have strong administrations, they offer a guarantee against future rises in tax rates, expropriation and leakage of information to other tax jurisdictions. The available evidence indicates that tax havens have flourished in the years since 1982 (Hines Jar. 2004). 2. Opportunities and incentives presented by tax havens 2 German Development Institute Mann and Beetles (2001) have estimated that, at the margin more than 65 percent of the additional revenue resulting from a unilateral tax increase is lost because of income shifting even among countries which are not tax havens.