Counter visits from more than 160  countries and 1400 universities (details)

The political economy of development
This academic site promotes excellence in teaching and researching economics and development, and the advancing of describing, understanding, explaining and theorizing.
About us- Castellano- Franšais - Dedication
Home- Themes- Reports- Statistics/Search- Lecture notes/News- People's Century- Puro Chile- Mapuche

                                   On Transfer-pricing                                                                          Search:  Transfer Pricing
The taxman's nightmare ( transfer-pricing by transnational corporations).
The strategy that gives the taxman nightmares involves shifting profits from high-tax to low-tax jurisdictions. This is done either by transferring a company's financial risk (and its potential future profits) to an Offshore Finance Center, or by exploiting the ambiguities of transfer-pricing rules which govern how multinationals (transnationals) divide up their profits among the countries they operate in.
( From
The Economist, 22 February 2007)

Shifting profits across borders

'Transfer pricing' is the biggest tax avoidance scheme of all. The government must insist on companies being more transparent

By Prem Sikka -, Thursday 12 February 2009 09.30 GMT

In recent days the Tax Gap series of articles has identified secrecy, complex organisational structures, tax havens and profit hungry accountancy firms as the key ingredients of the tax avoidance industry. They all come together in the biggest tax avoidance scheme of all, known as "transfer pricing". The name of the game is to shift profits to low tax jurisdictions and avoid taxes in countries where corporations have substantial trading operations.

Globalisation has enabled a computer microchip company to design its products in country A, manufacture in B, test in C, hold patents in D and assign marketing rights to a subsidiary in country E. Such a structure gives corporations huge discretion in allocating costs to each country and shift profits through internal trade. Around 60% of the world trade consists of transfers internal to multinational corporations. This gives them numerous opportunities for shifting profits across borders.

There are international rules on transfer pricing, but they all rely on notions of "costs" which are highly malleable. Tax rules require companies to use "arm's length" or normal commercial prices to transfer goods and services, but such prices are not always easy to find. Many markets are thin and often dominated by the same multinationals.

Transfer pricing is also big business. Ernst & Young, a major accountancy firm, markets its services with the statement that (see page 81 of this report) "successfully managing business and tax issues related to transfer pricing involves much more than documentation compliance. Transfer pricing affects almost every aspect of an MNE and can significantly impact its worldwide tax burden. Our ... professionals help MNEs address this burden ... with leading solutions. Our multidisciplinary team helps MNEs develop transfer pricing strategies, tax effective solutions, and controversy management approaches that best fit their objectives."

Tax authorities believe that multinationals manipulate the import and export prices to avoid taxes. China is an interesting case. It has enticed foreign capital by offering low taxes and other incentives. Foreign Direct Investment (FDI) has flooded in. Despite the perks, over 70% of multinational companies claim to be making losses. If so, why do they insist on making investment in China?

Christian Aid (pdf) estimates that developing countries may be losing over US$160bn of tax revenues a year, primarily through transfer pricing strategies. As a result, governments are unable to provide security, healthcare, education, sanitation facilities, clean water, transport and other essentials. Millions of people are sent to premature death.

Rather than giving credence to prices cooked up by companies, tax authorities should develop their own benchmarks. A related approach is a system of "formulary apportionment" where companies are taxed on the basis of their economic activity and income within a particular geographic jurisdiction rather than arbitrary allocation of costs to geographical areas.

Tax authorities lack the resources to combat the tax avoidance industry. Ernst & Young alone employs over 900 professionals to sell transfer pricing schemes. The US tax authorities employ about 500 full-time inspectors to pursue transfer pricing issues and Kenya can only afford between three and five tax investigators for the whole country.

Governments need to mobilise the public. Companies should be required to publish a table showing their sales, purchases, profits, assets, liabilities, taxes and employees in each country of their operations. Upon seeing that there are substantial sales and little profit, or large profit and very few employees in a jurisdiction, the public would know that some transfer pricing games have been played. Corporate tax returns should be publicly available. Companies should publish details of transfer prices actually used. The public may be horrified to learn that companies have priced (pdf) flash bulbs at $321.90 each, pillow cases at $909.29 each and a ton of sand at $1993.67, when the average world trade price was 66 cents, 62 cents and $11.20 respectively. Armed with this information people can decide to boycott the exploitative companies. Those devising abusive pricing structures should be held personally liable.

Cif editor's note: This article was published with comments off because of potential legal issues which might arise. Where possible, articles on this topic will be opened to comment during office hours. For those who want to follow all the developments in the Tax Gap series, please follow our tax blog.

 On Transfer-pricing
- Lecture notes
- Notes and papers
- Global Value Chains
- Integrated International

- International Division of

- Transnational Corporations
- The Triad ( U.S.A, Japan, E.U.)

- Dependency Theory
- Planning for Development
- The Developmental State
- The Neo-liberal State
- Development Economics
- The future of development

- Foreign Direct Investment
- Factor Payments from Abroad
- The New Economy in

- International Trade

Back to Economic Literacy
Back to K. Marx and A. Smith

From Biz/Ed
"A Web site for students and educators in business studies, economics, accounting, leisure, sport & recreation and travel & tourism."
GDP, GNP and economic growth

Interest Rate Transmission Mechanism ╗
Interactive Markets ╗
The Stock Exchange ╗
Maths in Business and Economics ╗
Online Economics Textbooks
Teaching Resources for Economics
The history of economic thought

McMaster University
Archive of the History of Economic Thought
by Roderick Hay
J. Sloman and M. Sutcliffe:
Tutor2u Economics.Com
Problems in Microeconomics
A Primer in European Macroeconomics
Economics Testing System
Economic Review
Resources for economists on the internet
Adam Smith:
The Wealth Of Nations
K. Marx/F. Engels:
Bourgeois and proletarians
Karl Marx:
and other early works

F. Engels:
Introduction to K. Marx's "Wage-labour and capital"
Karl Marx:
Wage-labour and capital

On Development Economics
The Future of Development Economics
The New Economy in Development
The Need to Rethink Development Economics
Development Economics
Economic Literacy
Basic knowledge on economics

RRojas Databank is a member of Development Gateway hosted by The World Bank

Education for Sustainability
Postgraduate courses on
Environment and
Development Education at
London South Bank University

- Part time distance learning
- Full time at the University

- Come visit us at

Back to Global Economic Prospects for Develeping Countries

--World Investment Reports
---(the complete series)

--World Investment Reports
---(selected statistics)

-- Planning for Development
UNCTAD areas of work:
Globalization and Development
Development of Africa
Least Developed Countries
Landlocked Developing Countries
Small Island Developing States
International Trade and

Services Infrastructure
Investment, Technology and
Enterprise Development

The following databases on-line are available:
Commodity Price Statistics
Foreign Direct Investment
Handbook of Statistics
ICT Statistics
Millennium Indicators

Digital Library:
-- News
-- Main publications
-- UNCTAD Series
-- Basic documents
-- Issues in Brief
-- Newsletters
-- Statistical databases
-- Globalization and
----- Development Strategies

-- Economic Development in
----- Africa

-- International trade
-- Dispute Settlement - Course
----- Modules

-- Investment, Technology and
-----Enterprise Development

-- Services Infrastructure for
--- Development and Trade
----- Efficiency

-- Monographs on Port
----- Management

-- Technical Cooperation
-- Discussion papers
-- G-24 Discussion papers
-- Prebisch Lectures
-- Transnational Corporations
----- Journal

-- Publications Survey 2006-

World indicators on the environment

World Energy Statistics - Time Series

Economic inequality

Other related themes:
- Aid
- Bureaucracy
- Debt
- Decentralization
- Dependency theory
- Development
- Development Economics
- Economic Policies
- Employment/Unemployment
- Foreign Direct Investment
- Gender
- Human Rights
- Human Development
- Hunger
- Inequality/social exclusion
- Informal sector
- Labour Market
- Microfinance
- Migration
- Poverty
- Privatization
- State/Civil Society/

- Sustainable Development
- Transnational Corporations
- Urbanization

- Complete list of development themes