Spot the problem: The EU recruits Multinational Accountants Price Waterhouse Coopers to address transfer pricing challenges in developing countries

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Recently The European Commission published a report entitled “Transfer pricing and developing countries,” which is meant to assist these countries with addressing the problem. Transfer pricing is the single biggest source of illicit financial flows in the world costing developing countries hundreds of billions of dollars every year.

While an assessment of the impact of transfer pricing in developing countries is sorely needed the report was narrowly focussed on the implementation and interpretation of the arms length principle. The arm’s length principle, promoted by the OECD that has proven to be very difficult to implement globally especially in poor countries.

The report played down the scale of tax dodging, and argued against further legal measures. This is especially disappointing as the report emerged from an earlier EC communication which acknowledged the scale of the tax dodging problem and discussed more promising and far reaching solutions. So why were alternative ways to tackle transfer pricing abuse by MNCs not considered especially when the EU is currently working on a common consolidated corporate tax base, based on a formulary apportionment a better antidote to transfer pricing?

Perhaps because the reports author was Price Waterhouse Coopers one of the Big 4 accountancy firms who provide advice to multinational companies (MNCs), including on how to minimise tax. Civil society groups feel the report is strongly biased towards the views of the private sector and that the authors lacked the development expertise needed for the topic.

Whilst the rhetoric in the report’s presentation endorsed “the principles of the Millenium Development Goals and … (transfer pricing) rule that favours developing countries,” Not surprisingly, the substance is unambitious reflecting the authors’ apparent conflict of interest. The report unconvincingly states that “the majority of taxpayers want to comply with local transfer pricing requirements in developing countries and seek guidance on how to apply appropriate remuneration for related-party transactions to reduce tax risks.”

Notes

There were some minor good points, frequent or high volume of interactions with low tax jurisdictions and tax havens was given as one criteria for identifying and investigating companies who appear likely to be engaging in tax evasion as part of the risk based approach. It was also pointed out that measures should be taken to prevent tax corruption by tax officials which was also slightly hypocritical in the circumstances. In the unlikely event that the reports recommendations could be perfectly implemented the estimated savings would still be dwarfed by the amount the countries studied for the report lost from transfer pricing, according to alternative estimates made by Christian Aid. The EC should consider appointing more impartial advisors or at least consulting those with a range of views and interests such as trade unions and NGOs not just accountants and multinational corporations. Future work should look beyond the insufficient arms length principle to other suggestions like formulary apportionment.

Read the full Eurodad report here.