A problem in fact about transfer pricing. A problem that perhaps the internationally reknowned expert on matters taxation could help with.
No it\’s all a bit ethereal at present. I don\’t know whether it\’s going to happen, I don\’t know whether it will happen in any volume if it does and don\’t know if it will continue for any substantial amount of time even if that does happen.
However, we reach an interesting problem in transfer pricing and thus the taxation of international business.
The concern is over two minerals that may or may not get exported from a Third World country.
One has a value to a small number of mineral collectors and no industrial value at all. Except to me, to whom it is really quite valuable for industrial purposes. And I emphasise this point: it\’s valuable to me for industrial purposes but to no one else for industrial purposes. That industrial value is a great deal higher than the value minerals collectors will put on it.
Why it has no value to anyone else is because they don\’t know about it, have no method of processing it and couldn\’t sell the resultant product even if they did have the knowledge and the capacity.
I think you can see the problem coming here: how should I value it for the purposes of transfer pricing? For the whole point of such transfer pricing is that it must be valued as an arms length transaction. I should not take account of any internal to my multi-national company (well, we haven\’t set that up yet but will if all of this becomes a reality) considerations. I must, under the rules, price the mineral on export from that Third World country at whatever someone else, not me, will be willing to pay for it.
The second mineral is slightly different. This is a well known, traded, market priced ore for a particular two metals. There\’s a well known pricing calculation that can be done (you\’ve got x% of this metal A, y% of the other metal B, the price is $z per lb of A2O5 + B2O5 contained, delivered Rotterdam duty unpaid where $z is a changeable quoted international price although not an exchange quoted one).
Now, the thing is that this specific mineral from one or two specific places in this Third World country could be (I\’m checking to see) worth a lot more to me than it is to everyone else. For this specific mineral from these couple of specific places could also have, in addition to the A+B, some measure of C2O3 in it. The volume of C is small, but the value is hugely higher (like, 40x A+B).
Which makes this mineral worth a great dfeal more to me than it does to anyone else. Again, because they don\’t know about it, couldn\’t process the C if they did and wouldn\’t be able to sell the C if they could.
Now in terms of fairness and economics, minerals are indeed part of the national patrimony. Yes, it is right that national governments get a chunk of the value of those minerals dug up in their jurisdiction. And the big question is, how are we to determine that value aso that the appropriate amount of tax is to be paid?
The answer is, this is the answer urged upon us both by campaigners and by the law, that we should regard that just and righteous valuation as being what would be an open market, arms length, transaction. One that is not between two related entities who are shifting cash around, but between two unrelated entities who are operating in an open market. Which is just fine.
So in order to set the price of this mineral for export from the Third World country I should therefore, in the first case, try selling some pieces to mineral collectors. Go on Alibaba, e-Bay, and see what prices I am offered. This then becomes that just and righteous export price. For the second I should ignore that higher to me value and work solely with the international and published price of the mineral.
Please do note that there\’s no offshore in here. There\’s no black hole into which excessive profits disappear: all will be taxed, what we\’re trying to work out is how much gets taxed in that Third World country and how much gets taxed inside the EU where the minerals will be processed.
But here\’s the thing. By obeying the law (and, if you like, the spirit of it) on transfer pricing I am quite deliberately according a much lower value to those minerals than their actual value to me. The profit declared in that Third World country will be hugely lower than the actual profit that will come from the whole process of extracting and processing those minerals.
It\’s entirely possible, just to give you an idea of the scale of this, that the observable global value of the second mineral is $20 a kg while the value to me is $80 per kg. Or of the first, $50 a kg to a minerals collector and $500 a kg to me (those are not actual pricings, just illustrations of the scale of the gap).
So, what actually is it that a poor boy like me is supposed to do? Obey the law and thus use an arms length transfer price and so grievously underestimate true value? Or ignore the law and do something else?
Obne possible solution would be that I have to tell everyone else what\’s in the mineral, teach them how to extract it and where to sell it when they have done so, create competition for myself and thus enable a true market price to be derived from arms length transactions.
But that would be insane, wouldn\’t it?
So what\’s the solution?