Analysis of current transfer pricing manipulation situation

February 8, 2022

The manipulation of transfer pricing by multinationals among their subsidiaries occurs when they do not comply with the Arm’s Length Principle nor reflect the market prices that would exist between two unrelated participants, resulting in price manipulation at the convenience of the company.

An example is what happened in 2012 with Starbucks, whose case revealed that it had sales worth 1.2 billion pounds sterling in the United Kingdom in the previous three years and did not pay corporate income tax because it reported zero profits. This was achieved through various practices such as transfer pricing, registering patents with a subsidiary in a low-tax jurisdiction outside the UK, and then making royalty payments to it, paying interest on loans.

Currently, most countries have bilateral tax treaties (approximately more than 3000 treaties), which means that the tax scenario is constantly changing and allows multinationals to use different transfer techniques from high tax jurisdictions to low tax jurisdictions.

Also, many payments between related companies are made for very specific goods or services, which means they don’t have comparable services or goods outside themselves, and these can define the rates to be paid in such a way that most of the profits from the actual activity flow to a potential tax haven. This is the current reality of transfer pricing manipulation.

Source: Rebelión 08/02/22