International Tax Policies
Economics: Edexcel A A Level, topic 9.2.1
Transfer Pricing and Global Tax Competition
Transfer pricing
- Transfer pricing describes businesses selling their products to entities in other countries.
- For example, Starbucks UK could transfer products to their Starbucks Ireland entity.
- Companies can choose the prices for transferring goods.
- Making sure that prices are high in high tax regions can mean that a company makes no profits in the UK, but very high profits in lower tax jurisdictions like Ireland.
Ireland and the EU
- In 2018, the EU investigated whether Ireland had made private agreements with companies.
- Between 2010 and 2015, royalty payments to Irish shell companies were worth 23% of Ireland’s GDP.
- Many Technology companies like Apple and Microsoft have large operations out of Ireland.
- In 2017, Facebook paid £5.1 million of tax in the UK.
- It had revenues of £850 million and has a profit margin of 38% in many places.
- This would imply they paid £5.1 million of tax. Assuming a profit margin of 38%, they paid a tax rate of 1.55% in the UK.
Tax competition
- Capital, companies and labour can relocate anywhere in the world because of globalisation.
- This can lead to a ‘race to the bottom’ as countries cut taxes to attract MNCs and wealthy individuals to their nation.
- Lewis Hamilton now lives in Monaco where there is a 0% tax rate on income.