Transfer Pricing As A Vehicle In International Tax Avoidance | 转移定价乃国际避税的一种手段
Updated: Dec 18, 2022
What is Transfer Pricing?
Transfer prices are the pricing at which various entities belonging to the same corporation transact business.
For instance, to cut down on its input costs, Starbucks can have a subsidiary in Indonesia that sells coffee to Starbucks Malaysia.
In recent years, multinational corporations have become increasingly popular in shifting earnings and avoiding taxes using transfer pricing among related businesses.
This practice has received broad criticism and significant attention from nations worldwide.
近年来，越来越多的跨国公司通过关联企业之间的转让定价来转移利润和避税。
这种做法受到了世界各国的广泛批评和高度重视。
Typically types of transfer pricing that take place between associated enterprises:
Purchase and sale of goods (parts, raw materials, and finished products);
purchase of equipment (fixed assets),
transfer and use of intangible assets (Patents, proprietary technology, trademarks, manufacturer names, etc.),
provision of management services (technology, management, advertising, consulting, etc.)；
financing； and
Leasing of tangible assets, etc.
Tax planning through transfer pricing between associated enterprises has developed into a typical strategy for evading taxes in economic operations across international borders.
In most cases, the enterprise in the high tax country will charge its associated enterprises in the low tax country a lower price for the sale of goods, provision of services, and transfer of intangible assets.
On the other hand, the enterprise in the low-tax country will charge a higher price for the sale of goods, provision of services, and transfer of intangible assets to its associated enterprises in the high-tax country.
Profits are moved from a country with a high tax rate to a country with a low tax rate to reduce the tax burden in a country with a high tax rate.
通常关联企业之间发生的主要转让定价类型：
购买和销售货物（零件、原材料和成品）；
购买设备（固定资产）；
无形资产的转让和使用（专利、专有技术、商标、厂商名称等）；
提供劳务（技术、管理、广告、咨询等）；
融资；及
有形资产的租赁等
通过使用关联企业之间的转让定价进行税收筹划，已经发展成为跨国经济活动业务中的一种典型的逃税策略。
在大多数情况下，高税率国家的企业将向其在低税率国家的关联企业收取较低的商品销售、服务提供和无形资产转让的价格。
另一方面，低税率国家的企业将对其在高税率国家的关联企业销售商品、提供服务和转让无形资产收取较高的价格。
利润从高税率国家转移到低税率国家，以达到减少高税率国家的税收负担的目的。
Example 1
Let's say there are two companies here:
the Star Coffee Company in Malaysia; and
The Moon Distribution Company in Country B.
Both Star Coffee Company and Moon Distribution Company are unrelated companies.
Star Coffee Company is responsible for manufacturing coffee powder in Malaysia, and Moon Distribution Company is in charge of selling coffee powder produced in Malaysia in Country B.
Since the Star Coffee Company and the Moon Distribution Company are two separate businesses with no connection to one another, the retail price of the coffee powder is established by the demand and supply dynamics of the market.
Consider the following scenario:
Star Coffee Company
spends $ 10,000 to buy coffee beans from Coffee Farm, an independent company in Indonesia
incurs an operational cost of $ 500
sell the finished goods to Moon Distribution Company for $ 15,000
Tax rate = 24%
Moon Distribution Company
spends $ 15,000 to buy coffee beans from Star Coffee Company
incurs an operational cost of $ 1,250
sell the finished goods to Moon Distribution Company for $ 18,250
Tax rate = 10%
The scenario described above is depicted in the following diagram:
The following are the Profit and Loss Accounts of Star Coffee Company and Moon Distribution Company:
The combined taxes that both Companies were required to pay was $1,280.
Now, assuming both Star Coffee Company and Moon Distribution Company belong to Sun Group.
Star Coffee Company makes coffee powder in Malaysia, while Moon Distribution Company sells those coffee powder in Country B.
Even though both Star Coffee Company and Moon Distribution Company are independent entities set up in different countries, they belong to Sun Group.
So, the sale price does impact their financial results. If Star Coffee Company charges more for coffee powder, it makes more profit, and Moon Distribution Company makes less and vice versa.
It does not make a difference to the shareholders of Sun Group, which of the two generates a higher net profit when looking at it solely from the standpoint of net profit.
However, it is essential to determine which of the two businesses should produce the greater profit in terms of taxation.
This is because a higher tax rate results in the payment of a greater amount of tax than a lower tax rate.
Because the tax rate in Malaysia is higher in comparison to the tax rate in country B, Sun Group believes that to increase the overall net profit of the group, Sun Group should allocate most of the net profit to Moon Distribution Company rather than Star Coffee Company.
So, what specific steps should be taken to accomplish the goal above?
It may be accomplished relatively easily by using transfer pricing, as market forces do not necessarily control transaction prices within a related group,
Consider the following new arrangement:
Star Coffee Company
spends $ 10,000 to buy coffee beans from Coffee Farm, an independent company in Indonesia;
incurs an operational cost of $ 500
sell the finished goods to Moon Distribution Company for $ 11,000 (before: $ 15,000)
Tax rate = 24%
Moon Distribution Company
spends $ 11,000 (before: $ 15,000) to buy coffee beans from Star Coffee Company;
incurs an operational cost of $ 1,250
sell the finished goods to Moon Distribution Company for $ 18,250
Tax rate = 10%
The following are the Profit and Loss Accounts of Star Coffee Company and Moon Distribution Company:
The combined taxes that both Companies were required to pay was $ 720 (before: $1,280).
Consequently, the group's profit will go up by $560.
Example 2
To give one more illustration, let's say that a company based in Malaysia develops a patent and then licences it to its subsidiary, which is situated in Ireland.
Suppose the Malaysia Company levies a very modest royalty fee.
In that case, most of the revenue will be kept in Ireland, and Ireland has a corporate income tax rate of only 12.5% rate.
At the group level, their tax burden will be reduced.
Can tax authorities regulate transfers and identify improper behaviour?
One could pose the following question: "Are the taxing authorities unable to regulate these transfers and identify any improper behaviour?" The correct response is "yes," and they do so.
Numerous countries have enacted transfer pricing rules and increased enforcement efforts to prevent the use of improper transfer prices to shift profits outside the bounds of their taxing jurisdiction
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