Why the Public Accounts Committee should call the OECD to give evidence

I couldn’t watch yesterday’s Public Accounts Committee (PAC) hearing. From what I could gather over Twitter it was a lot of fun, but didn’t shed any light on anything significant…and what we can learn from the evidence will I’m sure be covered on blogs elsewhere.

What I did hear, though, was a fascinating ten minute segment early in the morning on BBC Radio 4. John Christensen from Tax Justice Network was up after the OECD’s Marlies de Ruiter and alongside Kevin White of tax firm De Veer. I found the way that de Ruiter, who is the head of its transfer pricing and treaties division, explained the situation quite striking:

The big problem at this moment is that group companies, what they do is they strip out the legal ownership of the brands, of the patents, and put them in low tax jurisdictions together with a huge bulk of money. And then what they say is that the activities in China, in the UK and in the US should get a marginal return because all the risk is being run from the low tax jurisdiction and that all the excess profits should go to the low tax jurisdiction, and that’s something we’re targeting at the moment.

I don’t think I’ve heard such a dramatic description of the challenges facing transfer pricing from an official source before. The OECD’s published documents are, naturally, a lot more dry. But it does explain what’s happening quite well.

It’s the next statement that makes me think that the PAC would do well to question the OECD:

We have issued a report this summer saying that the returns related to these brands and patents should be attributed to the locations where the real economic activities take place… We should at least make sure that where the activities take place, that is where the profits go, and not to some sham company in a low tax jurisdiction.

Here de Ruiter is arguing that the OECD’s intangibles project is significant enough that it will address many of the concerns illustrated by cases such as those considered by the PAC, an assertion worth scrutinising. The UK is one of the biggest OECD members and it’s through the Treasury that it will have a say in the final outcome of this project. MPs’ current interest in how transfer pricing works could be an interesting opportunity for them to scrutinise the standard-setting process before decisions are taken, rather than waiting until after the event to examine its deficits. (Question: does parliament ratify changes to the OECD guidelines, or are they automatically applied?). They could begin by taking an active interest in whether or not the OECD’s current plans will have such a dramatic effect as de Ruiter is suggesting.

Tax Justice Network also argues that the system needs a complete overhaul, not just some tinkering. And Christensen seemed to have an unexpected ally on that point in his other interview partner, Kevin White, UK managing partner at De Veer group. White said of transfer pricing:

This is a historic law that goes back to the League of Nations and maybe needs to be changed, and the people that can change it are governments. When these laws were put in place, there weren’t really multinational companies, now there are and so it needs to be addressed at a higher level.

They may all have been half asleep, as I was. But what campaigner – or indeed what MP – is going to disagree with either White’s or de Reuter’s statements? Does the outcry over the recent corporate scandals mean that we’ve reached a point where campaigners, legislators, regulators and tax professionals all agree on some of the flaws in the current system? If so, perhaps we are entering a really interesting time for corporation tax. And if the result were to be to pique MPs’ interest in the arcane process of transfer pricing standard-setting, that would be pretty good going.

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4 thoughts on “Why the Public Accounts Committee should call the OECD to give evidence

  1. You’re probably aware that the OECD is holding a public consultation in Paris this week with its TP working group, practitioners and taxpayers, covering its current TP work – intangibles, safe harbours and timing. It started yesterday and ends tomorrow.

  2. Hi Martin – my (limited) understanding is that the pre-1998 OECD TP Guidelines were legislated into UK law in TIOPA 2010, which defines the UK’s ‘transfer pricing guidelines’ in law as any version of the OECD guidelines published before 1998. TIOPA 2010 also allows the Treasury to make an order incorporating any changes to the OECD guidelines made since that time or in the future. I *think* that under TIOPA 2010, orders made by the Treasury can be annulled by Parliamentary resolution – but not modified. You’d need to check with a constitutional expert on this.

    I agree that if we don’t like the OECD Guidelines, we really need to get MPs to start scrutinising them when they pass into UK law, and start calling the Guidelines’ bluff – that they are guidelines, not legally binding on any state. As with so much UK secondary legislation, the OECD Guidelines’ near automatic passage into UK law, and Parliament’s circumscribed powers of amendment, seem to make this difficult but not impossible.

    The bigger question about whether things have reached a sufficient head of steam to break the current international system: my suspicion is that this is true in the UK, but needs to be true in powerful countries outside the UK too, and here I’m not yet so sure. Germany’s interesting in this regard.

    And it’s presumably no surprise that there are unusual allies for radical reform: as with any revolution, the danger is that this moment gets hijacked in the opposite direction? In this case, obviously, calls to abolish taxes on corporate profits and move towards taxing sales instead. The first we could perhaps live with if something fairer came after. The second, as you’ve pointed out, could be seriously regressive both within and between states.

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