But then fumbles the implications of this.
I\’ve been telling him for years that there is a problem with his idea of country by country reporting. Which lies with the nature of the firm.
As we know firms exist when the existence of the firm is adding more value than a simple network of contracts will add. Thus we have a serious problem with taxing the same economic activity differently when it is inside or outside the same firm.
Ritchie finally gets this:
There are good economic reasons for saying this, and the most important by far is that the OECD’s transfer pricing regulations supposedly ensure that proper prices are charged within multinational groups of companies and yet in doing so completely ignore the existence of that multinational group, which is, of course, absurd. That is because the arm’s-length pricing model, on which the whole OECD principle of transfer pricing is based, assumes that there is a third party market in the goods or services that are transferred across international boundaries. In the vast majority of cases there aren’t such third-party markets. In most cases the particular goods or services supplied only exist within the multinational group, and with the concentration of economic power in an increasingly small number of global companies, it is now possible that up to 60% of world trade, according to the OECD, is in fact undertaken on an intra-group basis, meaning that finding any relevant basis for comparison of intergroup prices with market prices is almost impossible. The OECD then simply suggest in most cases that a markup be applied to the sale of goods or services from a country like Nigeria, and this almost invariably understates the level of profit attributable to such a country because the markup allowed tends to be too low because that markup is meant to be a third party markup when there is in fact supernormal profit released within the vertical supply chain that the transfer priced transaction is a part of. The OECD model captures none of that supernormal profit in Nigeria or any other developing country meaning that they will inevitably under record the profits that are due to them on the goods or services that they export. This just has to be wrong. A model for intragroup pricing that ignores the existence of the group, and a model for intragroup pricing that ignores the supernormal profits that drive the existence of that enterprise has to be inappropriate as a basis for allocating tax on an international basis within multinational groups of companies.
Quite. The value is being added by the nature of the firm, not by the underlying economic activity. It is the very existence of the firm that is leading to that superprofit: and no, we cannot allocate that superprofit on anything like a geographical basis because there is no geographical basis to that superprofit.
So, having found out that Coase upturns his entire taxation basis what does Ritchie then do?
Yup, muffs it.
With country by country reporting in place another basis of allocation of the profit of multinational companies is available. It would apply to all the profits, not the part that can be anchored into a particular location using the OECD rules, leaving much to roam free. That method of profit attribution would be unitary formula apportionment.
But if we\’re not going to try to locate the profits geographically, having already admitted that some part at least of the profits is not anchored geographically, then what in buggery do we need country by country reporting for? We can just look at global profit and use whatever apportionment system we want. We most certainly don\’t need detailed listings of profits by country if we\’re going to ignore profits made in countries as we tax profits now, do we?
Well done there Ritchie, killing the very thing you claim to have invented (not that you did invent it of course).
I notice that the OECD’s Transfer Pricing Guidelines have, in Ritchie-world, suddenly become “Regulations”.
I appreciate that some or all of the guidelines may have been implemented in national tax legislation or regulations but you sort compliance with those by going to your national documentation, not to the OECD publications.
I would also note that he is fundamentally wrong in his assumptions* – there are indeed markets in nearly all of the goods and services shuffled between different bits of the same firm (as many firms’ fetish for outsourcing shows.) It is just that the market pricing of those goods or services is rarely an effective comparator (as he admits.)
* Nothing new under the Sun, is there 🙂