Session objective: To facilitate an insight into the global nature of taxation and how companies can exploit the mismatches and loopholes in these rules to shift profits to low-tax jurisdictions and therefore make more profits.
Learning objective(s): By the end of the session, learners will –
- Have a basic understanding of tax havens
- Have a basic understanding of transfer (mis)pricing
Time required: 45 minutes
Group size: 24
Materials required:
- Projector (if in person)
- Screen/wall (if in person)
Methodology:
- Explain the learning objectives of the session.
- Think, pair, share: Ask the group to reflect individually on what they understand by the term ‘tax haven’. Then ask them to, in pairs, discuss their understanding.
- Facilitate a discussion, getting a few contributions from the group, to get a shared understanding of this term. Supplement where necessary.
- Share the following quote from Nicholas Shaxson with the group on a pre-prepared flip, “To escape rules you don’t like, you take your money elsewhere, offshore, across borders.”
- Watch the video ‘Transfer Pricing and Tax Havens’ with the group https://www.khanacademy.org/economics-finance-domain/core-finance/taxes-topic/corporate-taxation/v/transfer-pricing-and-tax-havens
Preparation in advance by the trainer:
The trainer should be able to explain clearly what a tax haven is, and be able to explain in simple terms how companies exploit global tax rules to shift profits.
Transfer pricing allows corporations to shift profits from high-tax jurisdictions to low-tax jurisdictions. Thus, a corporation is trading with different subsidiaries rather than with external companies. This artificial shift, when performed by multinational corporations that produce up to 80% of the world’s trade, will result in lower taxes.
This transfer pricing policy resulted in a U.S. Senate investigation of Apple Inc. The Senate found that an Apple entity in Ireland received $74 billion in global receipts from 2009 to 2012, on which Apple paid a tax of less than 2% to Ireland. Another entity received $30 billion and paid nothing. The European Commission has said Ireland gave Apple undue tax benefits and must recover 13 billion euros in unpaid taxes.678
This was since appealed by Ireland, and Ireland won the case.
Multinationals can manipulate the transfer prices of transactions between these affiliates/subsidiaries to shift profits from high- to low-tax jurisdictions. For example, a firm’s affiliate may hold a patent in a low-tax haven and charge exorbitant brand royalties to affiliates in high-tax countries, thus maximizing profits in the low-tax jurisdiction. In theory, transfer prices are meant to reflect market prices that would prevail in arm’s length transactions between two unrelated parties. But such prices often cannot readily be established: try valuing a unique widget for a jet engine that isn’t sold on the open market, or a drug patent. In practice, the value is often what the company’s accountants say it is.
