Transfer pricing is a very taxing issue

Transfer pricing is a very taxing issue

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Police officers protect a branch of Starbucks after demonstrators threatened to occupy it during a protest march in central London in October last year.
Police officers protect a branch of Starbucks after demonstrators threatened to occupy it during a protest march in central London in October last year.
Photo: Reuters

The public outcry against corporate tax avoidance is unsurprisingly in sync with the bleak economic climate across Europe and the US. Coffee chain Starbucks has single-handedly demonstrated that not paying its due share of tax can generate intense anti-rich sentiments.

At the end of last year, pressure group UK Uncut staged a country-wide protest against government spending cuts. It urged authorities to confront economic problems by clamping down on unscrupulous corporate tax-dodging activities such as those of Starbucks.

Despite the GBP3bn sales Starbucks has achieved in the UK since 1998, it has paid just GBP8.6m in corporation tax. This ratio is infuriating.

The crux of this issue is that tax avoidance is legal. Let's clarify this: tax "evasion" arises from non-compliance with the law, whereas tax "avoidance" is legal because efforts can be made to ensure those balance sheets correspond with government legislation.

It is not rocket science for a few accountants and lawyers to patch together a tax minimisation, or even elimination, strategy that is within the bounds of the law.

Due to the global reach of transnational corporations, establishing offshore accounts in tax havens such as Switzerland, Liechtenstein and the British Virgin Islands is common practice for them.

Through a canny technique called transfer pricing, companies based in a high-tax jurisdiction can easily sell their own output to a subsidiary in a lower-tax jurisdiction at a price well below its true value.

Meanwhile, any profits that may be taxed can also be transferred to tax havens. Consequently, the arm of the company residing in the higher-tax country will pay significantly less tax than it should.

It goes without saying that nobody likes paying tax. However, corporate tax avoidance is comparable to parents setting a bad example to their children. In the same way that you probably would not expect parents who regularly steal from the local supermarket to teach their child to become an honest citizen, it is near impossible to justify to individuals why they should adhere to tough income tax regulations when big firms are not paying their corporate tax.

Yes, it is true that corporations abide by laws. Those laws, however, have failed to draw a solid line between legal and illegal tax activities.

The truth is the resourceful and clever parties always get away with it.

Companies love to brag about their powerful sense of corporate responsibility; perhaps paying their fair share of tax is a good place to start.[IMG]

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