Over the break I read Sol Picciotto’s seminal International Business Taxation, published in 1992. It’s not hard to see why this book has acquired the status – in academia at least – of definitive account of the international tax system and its foundation. And it is interesting to see that the current outcry over transfer pricing is hardly new.
Vanessa Houlder in the Financial Times this week draws a comparison with President Kennedy’s anger in 1961 at, “the ‘unjustifiable’ use of tax havens by growing numbers of businesses to slash their tax liabilities at home and abroad.” Sol’s book includes a couple of further examples from past eras, including the following, which apparently became a cause celebre:
A report by the British Monopolies Commission in 1973 revealed that Roche UK was paying grossly inflated prices to its Swiss affiliate for the active ingredients for drugs to be packaged for sale; these drugs were librium and valium, wonderful new non-barbiturate tranquilizers, sold on prescription and therefore mostly paid for by the National Health Service. Roche’s transfer price was £370 a kilo for librium and £922 for valium, while the same active ingredients could be obtained from small companies in Italy (where Roche’s patents were not protected) for £9 and £20 per kilo respectively. The company told the Monopolies Commission that its pricing policy for drugs was based on what the market would bear in each country, although in the UK the price was negotiated with the government under the then-voluntary price regulation scheme for pharmaceuticals. The British subsidiary’s accounts showed direct payments to its parent company for overheads, especially for the heavy research programme in its Swiss and US laboratories. These were determined by what the Inland Revenue would allow by comparison with similar UK pharmaceutical firms – about 12 per cent of sales. But Roche’s UK business was concentrated on a few, highly-profitable items – tranquilizers and vitamins. Thus, Roche argued that it was not fair to look at the profitability of individual drugs, especially such highly successful ones as librium and valium, since these must finance the company’s overall research effort. However, it refused to provide the Commission with data on its worldwide activities.
Not transfer pricing as we know it, but definitely a dispute over comparables. In an echo of recent events, “the dispute was eventually settled by the payment of an agreed sum to the NHS.”
Meanwhile across the pond:
A staff study for the Oversight Subcommittee of the House Ways and Means Committee in July 1990 highlighted figures showing that 25 Pacific-rim and eleven European-based multinationals with more than $35 billion in retail sales in the US in 1986 paid little or no income tax while handling billions of dollars distributing foreign-made products in the US for their foreign parents. It was stated that the 36 companies accomplished this through ‘inflated pricing of goods purchased from the foreign parent, or the performance of functions not properly compensated for by the foreign parents.
So are we at a turning point where, in Houlder’s words, “businesses would be well advised to brace for higher tax bills,” or are we simply in the middle of yet another cyclical bout of public and political outrage? I thought it was interesting to read what the OECD’s Pascal Saint-Amans told her:
The aggressive tax planning of the last 20 years was achieved with the complicity of governments themselves to cope with tax competition. This mindset is seriously changing.
It’s pretty strong stuff to suggest that governments effectively condoned the practices that they are now criticising. But his predecessor, Jeffrey Owens, concurs:
Governments have made the business tax system more friendly since the mid 1980s. Now it is payback time.
But I also share Chris Lenon’s scepticism about a crackdown that appears to be spearheaded by the UK government. As he points out, in some ways the direction of travel for our system of business taxation is much the other way round:
The problem is the inability of governments to agree with each other on which dispensations are good and which are bad – the usual line is that ours is fine and yours aren’t! So is the Dutch dispensation which Starbucks and other US multinationals uses (which I assume is the target of the PM’s comments) bad compared with the new Patent Box rules which are about to come into effect in the UK ? Will the patent box foster “really aggressive tax avoidance”?