Following a recent article in the Sunday Times, I was reminded that International Transfer Pricing effects us all. The story was about the UK tax paid by Google and claimed that by the use of International Transfer Pricing they avoid £3bn a year
in UK taxes.
Transfer pricing is basically the advantageous setting of charges between related parties. Whilst most people may think this may mainly exist between a parent and subsidiary company the extent this is used by multi nationals is far more than this.
I haven’t got space to start an ethical debate about the unfairness of transfer pricing, but I thought that I would help you make your own mind up by illustrating the journey of a banana.
The tax journey of a banana is not as simple as following its trip from being grown in Latin America, shipped to the UK, sold in a supermarket and then being consumed.
The paper trail is often far more complicated than this.This is because transfer pricing aims to pay little tax where taxation is high and make larger profits in tax havens where there is little or no tax at all.
Lets look at how this might work for the bananas you've just bought for £1,
The banana may leave the country where it has been grown for 13p. If costs amount 1.5p for labour and 10.5p for production, there is 1p profit taxable in the developing country (30% tax).
On paper, the banana may then go to the Cayman Islands (0% tax) where a subsidiary charges 8p for use of its purchasing network.
Then onto Luxembourg (0% tax) where the group's financial services are based - a charge here of 8p which may include interest.
Ireland (12.5% tax) is next, (a common location for brands) where a brand licence charges 4p. An Isle of Man (10% tax) insurance subsidiary then charges 4p.
Jersey (10% tax) could be next where a management royalty of 6p is charged Bermuda (0 % tax) is last where the cost of distribution is added including a charge for the use of its expert network, another 17p. That all comes to 60p with only 1.8p of tax paid - that's an effective tax rate of 3% The banana is then sold to a retailer for something close to 60p who then sells it to you for a £1.
For more information on how Randall and Payne can help you call Chris Mattos on 01453 763471
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