"The problem is, in the absence of effective reform, the blatant tax dodging engaged in by the likes of Glencore and Rupert Murdoch corrodes public trust in governments and, ultimately, the domestic tax base itself."Transfer pricing doesn't need to apply to physical goods -- it's even easier for intangibles like intellectual property. Apple, for example, is able to avoid billions in taxes in countries like Australia and even its home in the United States by basing its intellectual property in the tax haven of Ireland, from where it charges other arms of Apple inflated prices to use it. IKEA shops around the world pay royalties to a holding company based in another tax haven, the Netherlands. And it's easier still for intra-firm financial transactions -- a low tax-based arm charging another arm in a high-tax jurisdiction a higher interest rate, for example. Glencore has been accused of using intra-firm derivatives trading to reduce its British tax liabilities by tens of millions of pounds. Many countries, including Australia, try to block transfer pricing with tax rules based on "arm's length pricing" principles, which form a key part of the OECD's Model Tax Convention, but that's no panacea. Establishing comparable market prices for all transactions is resource-intensive for governments, and difficult or impossible for intangibles like IP, which form a growing proportion of world trade. Transfer pricing does rely on tax differentials between jurisdictions, and the ability of multinationals to locate an arm in tax havens, where profits can be maximised. But what exactly is a tax haven isn't clearly defined, and attempts by the G20 and the OECD to blacklist countries as tax havens have foundered -- the current OECD tax haven blacklist is literally empty. Nor are they confined to Caribbean islands or European principalities: Ireland's entire economic model relies on offering very low corporate tax rates, the Netherlands also offers low tax rates and exemptions, which can interact with other jurisdictions' systems to produce even lower tax rates (thus, the "Double Irish With a Dutch Sandwich" arrangement, although Ireland has belatedly now closed the Double Irish loophole). And the world's biggest tax haven is Switzerland, where many tax dodgers, including Glencore, are based -- although so notorious is Glencore for its tax practices that even its neighbours have taken to sending Glencore's local tax contributions to African and South American charities. The current G20 strategy, agreed last month at the finance ministers' meeting in Cairns chaired by Treasurer Joe Hockey, focuses on putting in place automatic exchange of tax information -- which sounds wishy-washy but is intended to prevent companies from exploiting jurisdictions' ignorance of what companies are telling them about where profits are earnt, another useful avoidance technique. The G20 and the OECD also have a joint "Action Plan on Base Erosion and Profit Shifting", which inter alia specifically targets the use of related-party interest payments to avoid tax and the need to tighten tax treaties that can be abused by multinationals. The biggest impediment, however, remains the reluctance of some large jurisdictions, including the UK, to sacrifice what they regard as aspects of genuine international tax competition rather than tax dodging. The challenges of making international taxation work better are complex, but political will is the greater challenge. The problem is, in the absence of effective reform, the blatant tax dodging engaged in by the likes of Glencore and Rupert Murdoch corrodes public trust in governments and, ultimately, the domestic tax base itself. Why should the rest of us pay our fair share of tax when multinational corporations are getting away with paying a small fraction of what they should be giving tax authorities?
Your quick guide to multinational tax dodging
Multinational tax avoidance is a truly massive problem -- but defining it is the first of many challenges.