Tuesday, 29 May 2007

The Growing Abuse Of Transfer Pricing By TNCs

By Kavaljit Singh

28 May, 2007

The large-scale tax avoidance practices used by transnational corporations (TNCs) came into public notice recently when the giant drug TNC, GlaxoSmithKline, agreed to pay the US government $3.4 billion to settle a long-running dispute over its tax dealings between the UK parent company and its American subsidiary. This was the largest settlement of a tax dispute in the US. The investigations carried out by Internal Revenue Service found that the American subsidiary of GlaxoSmithKline overpaid its UK parent company for drug supplies during 1989-2005 period, mainly its blockbuster drug, Zantac. These overpayments were meant to reduce the company's profit in the US and thereby its tax bill. The IRS charged the Europe’s largest drugs company for engaging in manipulative “transfer pricing.”

What is transfer pricing? Transfer pricing is the price charged by one associate of a corporation to another associate of the same corporation. When one subsidiary of a corporation in one country sells goods, services or know-how to another subsidiary in another country, the price charged for these goods or services is called the transfer price. All kinds of transactions within the corporations are subject to transfer pricing including raw material, finished products, and payments such as management fees, intellectual property royalties, loans, interest on loans, payments for technical assistance and know-how, and other transactions. The rules on transfer pricing requires TNCs to conduct business between their affiliates and subsidiaries on an “arm's length” basis, which means that any transaction between two entities of the same TNC should be priced as if the transaction was conducted between two unrelated parties.

Transfer pricing, one of the most controversial and complex issues, requires closer scrutiny not only by the critics of TNCs but also by the tax authorities in the poor and the developing world. Transfer pricing is a strategy frequently used by TNCs to book huge profits through illegal means. The transfer price could be purely arbitrary or fictitious, therefore different from the price that unrelated firms would have had to pay. By manipulating a few entries in the account books, TNCs are able to reap obscene profits with no actual change in the physical capital. For instance, a Korean firm manufactures a MP3 player for $100, but its US subsidiary buys it for $199, and then sells it for $200. By doing this, the firm’s bottom line does not change but the taxable profit in the US is drastically reduced. At a 30 per cent tax rate, the firm’s tax liability in the US would be just 30 cents instead of $30.

TNCs derive several benefits from transfer pricing. Since each country has different tax rates, they can increase their profits with the help of transfer pricing. By lowering prices in countries where tax rates are high and raising them in countries with a lower tax rate, TNCs can reduce their overall tax burden, thereby boosting their overall profits. That is why one often finds that corporations located in high tax countries hardly pay any corporate taxes.

A study conducted by Simon J. Pak of Pennsylvania State University and John S. Zdanowicz of Florida State University found that US corporations used manipulative pricing schemes to avoid over $53 billion in taxes in 2001. Based on US import and export data, the authors found several examples of abnormally priced transactions such as toothbrushes imported from the UK into the US for a price of $5,655 each, flash lights imported from Japan for $5,000 each, cotton dishtowels imported from Pakistan for $153 each, briefs and panties imported from Hungary for $739 a dozen, car seats exported to Belgium for $1.66 each, and missile and rocket launchers exported to Israel for just $52 each.

With the removal of restrictions on capital flows, manipulative transfer pricing has increased manifold. According to UNCTAD’s World Investment Report 1996, one-third of world trade is basically intra-firm trade. Because of mergers and acquisitions, intra-firm trade, both in numbers and value terms, has increased considerably in recent years. Given that there are over 77,000 parent TNCs with over 770,000 foreign affiliates, the number of transactions taking place within these entities is unimaginable. Hence, it makes the task of tax authorities extremely difficult to monitor and control each and every transaction taking place within a particular TNC. The rapid expansion of Internet-based trading (E-commerce) has further complicated the task of national tax authorities.

Not only do TNCs reap higher profits by manipulating transfer pricing: there is also a substantial loss of tax revenue to countries, particularly developing ones, that rely more on corporate income tax to finance their development programs. Besides, governments are under pressure to lower taxes as a means of attracting investment or retaining a corporation’s operation in their country. This leads to a heavier tax burden on ordinary citizens for financing social and developmental programs. Although several instances of fictitious transfer pricing have come to public notice in recent years, there are no reliable estimates of the loss of tax revenue globally. The Indian tax authorities are expecting to garner an additional US$111 million each year from TNCs with the help of new regulations on transfer pricing introduced in 2001.

In addition, fictitious transfer pricing creates a substantial loss of foreign exchange and engenders economic distortions through fictitious entries of profits and losses. In countries where there are government regulations preventing companies from setting product retail prices above a certain percentage of prices of imported goods or the cost of production, TNCs can inflate import costs from their subsidiaries and then charge higher retail prices. Additionally, TNCs can use overpriced imports or underpriced exports to circumvent governmental ceilings on profit repatriation, thereby causing a drain of foreign exchange. For instance, if a parent TNC has a profitable subsidiary in a country where the parent does not wish to re-invest the profits, it can remit them by overpricing imports into that country. During the 1970s, investigations revealed that average overpricing by parent firms on imports by their Latin American subsidiaries in the pharmaceutical industry was as high as 155 per cent, while imports of dyestuff raw materials by TNC affiliates in India were overpriced in the range of 124 to 147 per cent.

Given the magnitude of manipulative transfer pricing, the Organization for Economic Co-operation and Development (OECD) has issued detailed guidelines. Transfer pricing regulations are extremely stringent in developed countries such as the US, the UK, and Australia. In the US, for instance, regulations related to transfer pricing cover almost 300 pages, which dent the myth that the US espouses “free market” policies.

However, developing countries are lagging behind in enacting regulations to check the abuse of transfer pricing. India framed regulations related to transfer pricing as late as 2001. However, many countries including Bangladesh, Pakistan, and Nepal, tax authorities have yet to enact regulations curbing the abuse of transfer pricing mechanisms. The abuse of transfer pricing mechanisms could be drastically curbed if there is an enhanced international coordination among national tax authorities.

Thursday, 10 May 2007

Blair - Bush's Zombie Shuffles Off Stage

By Tariq Ali

10 May, 2007

Tony Blair's success was limited to winning three general elections in a row. A second-rate actor, he turned out to be a crafty and avaricious politician, but without much substance; bereft of ideas he eagerly grasped and tried to improve upon the legacy of Margaret Thatcher. But though in many ways Blair's programme has been a euphemistic, if bloodier, version of Thatcher's, the style of their departures is very different. Thatcher's overthrow by her fellow-Conservatives was a matter of high drama: an announcement outside the Louvre's glass pyramid during the Paris Congress brokering the end of the Cold War; tears; a crowded House of Commons. Blair makes his unwilling exit against a backdrop of car-bombs and mass carnage in Iraq, with hundreds of thousands left dead or maimed from his policies, and London a prime target for terrorist attack. Thatcher's supporters described themselves afterwards as horror-struck by what they had done. Even Blair's greatest sycophants in the British media: Martin Kettle and Michael White (The Guardian), Andrew Rawnsley (Observer), Philip Stephens (FT) confess to a sense of relief as he finally quits.

A true creature of the Washington Consensus, Blair was always loyal to the various occupants of the White House. In Europe, he preferred Aznar to Zapatero, Merckel to Schroeder, was seriously impressed by to Berlusconi and, most recently, made no secret of his desire that Sarkozy was his candidate in France. He understood that privatisation/deregulation at home were part of the same mechanism as the wars abroad. If this judgement seems unduly harsh let me quote Sir Rodric Braithwaite, a former senior adviser to Blair, writing in the Financial Times on 2, August, 2006:

"A spectre is stalking British television, a frayed and waxy zombie straight from Madame Tussaud's. This one, unusually, seems to live and breathe. Perhaps it comes from the Central Intelligence Agency's box of technical tricks, programmed to spout the language of the White House in an artificial English accent...

Mr Blair has done more damage to British interests in the Middle East than Anthony Eden, who led the UK to disaster in Suez 50 years ago. In the past 100 years--to take the highlights--we have bombed and occupied Egypt and Iraq, put down an Arab uprising in Palestine and overthrown governments in Iran, Iraq and the Gulf. We can no longer do these things on our own, so we do them with the Americans. Mr Blair's total identification with the White House has destroyed his influence in Washington, Europe and the Middle East itself: who bothers with the monkey if he can go straight to the organ-grinder?..."

This, too, is mild compared to what is said about Blair in the British Foreign Office and the Ministry of Defence. Senior diplomats have told me on more than one occasion that it would not upset them too much if Blair were to be tried as a war criminal. More cultured critics sometimes compare him to the Cavaliere Cipolia, the vile hypnotist of fascist Italy, so brilliantly portrayed in Thomas Mann's 1929 novel 'Mario and the Magician'. Blair is certainly not Mussolini, but like the Duce he enjoyed to simultaneously lead and humiliate his supporters.

What much of this reveals is anger and impotence. There is no mechanism to get rid of a sitting Prime Minister unless his or her party loses confidence. The Conservative leadership decided that Thatcher simply had to go because of her negative attitude to Europe. Labour tends to be more sentimental towards its leaders and in this case they owed so much to Blair that nobody close to him wants to be cast in the role of Brutus. In the end he decided to go himself. The disaster in Iraq had made him a much hated politician and slowly support began to ebb. One reason for the slowness was that the country is without a serious opposition. In Parliament, the Conservatives simply followed Blair. The Liberal-Democrats were ineffective. Blair had summed up Britain's attitude to Europe at Nice in 2000:

"It is possible, in our judgement, to fight Britain's corner, get the best out of Europe for Britain and exercise real authority and influence in Europe. That is as it should be. Britain is a world power."

This grotesque, self-serving fantasy that 'Britain is a world power' is to justify that it will always be EU/UK. The real union is with Washington. France and Germany are seen as rivals for Washington's affections, not potential allies in an independent EU. The French decision to re-integrate themselves into NATO and pose as the most vigorous US ally was a serious structural shift which weakened Europe. Britain responded by encouraging a fragmented political order in Europe through expansion and insisted on a permanent US presence on the continent.

Blair's half-anointed, half-hated successor, Gordon Brown, is far more intelligent (he reads books) but politically no different. There might be a change of tone, but little else. It is a grim prospect with or without Blair and an alternative politics (anti-war, anti-Trident, defence of public services) is confined to the nationalist parties in Scotland and Wales. Its absence nationally fuels the anger felt by substantial sections of the population, reflected in voting (or not) against those in power.

Sunday, 6 May 2007

Yeltsin - Sinister side of the clown

by Mahir Ali; May 05, 2007

SOME of Boris Yeltsin’s worst transgressions barely rated a mention in much of the media coverage that followed his demise last month. The broad tendency was to paint him as Russia’s democratic saviour, a political colossus given to occasional acts of drunken tomfoolery.

In a tribute published in The New York Times last Sunday, Bill Clinton described him as imperfect but “intelligent, passionate, emotional, strong-willed and courageous”, concluding: “Russia and the world were lucky to have him. History will be kind to my friend Boris.”

Among the stock footage favoured by many television networks over the past 10 days is a clip that shows Yeltsin making a remark that prompts an outburst of Clintonian laughter. It dates back to the period when Clinton compared him with Abraham Lincoln, a compliment that coincided with the destruction of Grozny by Russian planes, tanks and missiles.

Apart from the indelible image of Yeltsin berating troops from atop a tank outside the Russian parliament in August 1991, news reports tended to focus on the lighter moments in the former president’s career: Boris the friendly bear dancing on stage with a rock group, Boris the muzhik greeting an unsuspecting woman with a pinch on the backside, Boris the jester pretending to conduct a German orchestra. One almost expected the compilation of clips to be followed by a blurb along the lines of: “I thought Boris Yeltsin was a leading 20th-century political figure, until I discovered Smirnov” (or Stolichnaya, as the case may be).

Hardly any network deemed it worthwhile to visually juxtapose that moment of bravery - or at least bravado - from August 1991, when the coup attempt against Soviet president Mikhail Gorbachev provided Yeltsin with the opportunity to strike a pose that would be recognized by posterity as his finest hour, with the scene some two years later in exactly the same part of Moscow, when Yeltsin ordered a military assault against the same Russian parliament that stood by him in 1991. This instance of state terrorism enjoyed widespread western approbation at the time and continues to be glossed over in retrospect, with leading American newspapers fallaciously describing it as a successful effort to defeat a communist coup attempt.

In certain other contexts, such as the economic “shock therapy” that reduced a large proportion of Russians to penury, liberal western media organs are now prepared to admit that Yeltsin was seriously mistaken, albeit without acknowledging the folly of their uncritical contemporary support. The blanket stamp of approval was somewhat more difficult in the case of the systematic violation of human rights in Chechnya. But then, what’s indefensible can often be ignored, and perhaps it’s not surprising that images of the havoc wreaked in Grozny and the massacres perpetrated in Chechen villages by ill-trained Russian conscripts have generally been absent from recent coverage of the Yeltsin years.

Boris Yeltsin was an unknown quantity when, shortly after the advent of Gorbachev, he was plucked from Sverdlovsk and installed as the metropolitan party leader in Moscow. His populist approach to the job offered a sharp contrast to the cautious conservatism traditionally associated with party bureaucrats, and Muscovites relished the sight of the local party chief travelling on public transport, publicly sounding off about empty shelves in shops, tracking down hoarders and lamenting the slow pace of perestroika. In the reformist atmosphere introduced by Gorbachev, Yeltsin swept through the Soviet capital like a fresh breeze.

His acrimonious rupture with the Communist Party did his popularity no harm. He seemed to represent the future, whereas much of the party, despite all of Gorbachev’s efforts, still seemed to be mired in the past. If Muscovites could have envisaged at that point the sort of future that lay in wait, their attitude may have changed dramatically - as it eventually did: on the eve of his departure from the Kremlin at the end of 1999, Yeltsin’s popularity had dwindled to two per cent.

Ten years earlier, however, his incessant attacks on the privileges enjoyed by the Communist hierarchy and the hurdles in the path of democratic reforms fell on receptive ears. In the first contested elections to the Russian Federation’s Congress of People’s Deputies, Yeltsin stood against a party candidate and won by a huge majority. Those elections, organized while the USSR was very much intact, were arguably the fairest that Russia has witnessed.

The parliament elected Yeltsin as its chairman, but he had set his eyes on a higher goal, and in mid-1991 he achieved his ambition by becoming Russia’s first directly elected president - a platform that strengthened his ability to undermine Gorbachev, whose elevation to the post of the Soviet Union’s first executive president had not been preceded by a popular vote.

A couple of months later, Yeltsin leapt to his rival’s defence when a conspiracy between members of the party hierarchy, the interior ministry and the KGB led to Gorbachev being taken prisoner. The coup-makers, who ostensibly wanted to reverse the reform process, behaved like nervous clowns. A more ruthless and clearly thought-out operation would, at the very least, have entailed Yeltsin’s neutralization. Instead, although tanks were ordered on to the roads, the soldiers manning them were sufficiently confused by their mission to be obeying the traffic lights.

Muscovites reacted to the show of force by pouring on to the streets, determined to resist the backwards lurch, and buoyed no doubt by Yeltsin’s declaration from atop a T-72 tank: “We are dealing with a right-wing, reactionary, anti-constitutional coup d’etat. We appeal to the citizens of Russia to give an appropriate rebuff to the putschists. The legally elected president of the country has been removed from power. We proclaim all decisions and decrees of this committee [formed by the conspirators] to be illegal.”

Chances are that the coup would have floundered anyhow, but it did wonders for Yeltsin’s image - although he found time for other pursuits during those three crucial days: on one occasion, former foreign minister Eduard Shevardnadze found him passed out on the carpet, with an empty bottle of vodka close by. Meanwhile, the coup attempt set the scene for three momentous events: the humiliation of Mikhail Gorbachev, the disbanding of the Communist Party and, within months, the dismemberment of the Soviet Union. Yeltsin was instrumental in each of them.

The final act involved a meeting between Yeltsin and the leaders of Ukraine and Byelorussia in a hunting lodge near the Polish border, where they arbitrarily chose independence for the USSR’s constituent republics, pre-empting a new union treaty that had been all but finalized. The undemocratic and unconstitutional move was effectively another coup against Gorbachev. The theoretical burial of the Soviet Union was followed by a feast that ended in a drunken brawl.

In the brave new Russia, the sudden removal of state subsidies was accompanied by the sale of state assets at throwaway prices. A handful of enterprising folk grew very, very rich while millions saw their savings rendered worthless: in 1992, inflation went up by 2,000 per cent. These policies inevitably invited parliamentary efforts to overturn them, leading to the 1993 confrontation. It seems perverse for the man who ordered military action against his nation’s parliament to be hailed as the father of Russian democracy, but in some eyes Yeltsin could do no serious wrong: he may have been a bit of a monster, but he was a monster who devoured communism and usually obeyed the west.

So who cares that in 1996, faced with the prospect of defeat in his re-election attempt, he seriously toyed with the idea of dispensing with the democratic process, until the crony capitalists he had nurtured came to his aid? Vladimir Putin, who isn’t always prepared to kowtow to the west, is often accused of possessing an authoritarian streak, but it’s seldom noted that he inherited it from Yeltsin - whose choice of successor, incidentally, was guided by one overriding factor: it had to be someone who would guarantee the outgoing president and his family immunity from prosecution. Yeltsin’s distaste for privileges and corruption had not survived the collapse of communism.

Towards the end of his tenure, a pair of scholars, Professor Peter Reddaway and Dmitri Glinski, offered this scathing opinion: “For the first time in recent world history one of the major industrial nations with a highly educated society has dismantled the results of several decades of economic development.” Small wonder, then, that when foreign correspondents took to the streets of Moscow for a vox pop last week, they could hardly find anyone willing to say a kind word about a leader who, whatever Bill Clinton may say, is likely to go down in history as a destroyer rather than a builder. “I think all of Russia is celebrating in silence,” ventured one young man. Gorbachev’s reaction, not surprisingly, was more measured: “A tragic fate,” he noted. “On [his] shoulders rest major events for the good of the country as well as serious mistakes.” Margaret Thatcher, meanwhile, echoed many of her ideological peers - and demonstrated her tenuous grasp of recent history - in describing the deceased as a “patriot and liberator” without whom “Russia would have remained in the grip of communism”.

A week ago, the late Russian leader became the first of his ilk since the days of the tsars to be laid to rest following a church service. Perhaps a suitable epitaph, simply and accurately summarizing the complexities of his political career, could have been: “Here lies Boris Nikolayevich Yeltsin, sober at last...”