Which nation or territory is the world’s biggest exporter of bananas, would you say?
Brazil? Columbia? Malaysia?
No, none of those. The answer, believe it or not, is Jersey (according to Paul Collier’s article on tax avoidance for Prospect).
To most of us, this Channel Island is better known for its cows and potatoes than its tropical fruit; but strange things abound in the world of corporate tax avoidance – in particular when it comes to a clever little dodge called transfer pricing:
- “The plain vanilla form of transfer pricing is for the subsidiary of a company which is based in a high-tax jurisdiction to sell its output to one in a lower-tax jurisdiction at a price below its true value. Or, with equivalent effect, it might buy an input that was over-priced…
- “The distinctive aspect of transfer pricing is that profits are shifted between countries by the artifice of accountants and lawyers rather than by relocating real economic activity. The scope for transferring real economic activity is naturally bounded by the economic characteristics of locations… In contrast, the scope for shifting profits through transfer pricing is unbounded…”
Of course, in developed countries, the tax authorities are wise to such tricks:
- “G8 countries woke up to plain vanilla transfer pricing decades ago. They now contain it through scrutinising the prices used for intra-corporate transactions and comparing them to third-party prices.”
What isn’t appreciated, however, is that in poorer parts of the world the dodgers can still get away with it:
- “[Transfer pricing] remains a severe problem in Africa since the typical tax authority lacks the capacity to scrutinise and compare prices… While there are transparent global markets in refined metals, with observable prices, there are no equivalent markets for ores. So, a mining company which sells its ore to a parent company abroad for refining can potentially use a notional ore price that keeps the subsidiary at break-even.”
So how do third world governments generate income from international corporate activity in their countries? Well, there’s one obvious way:
- “Corporate opacity not only assists tax avoidance, it is the key vehicle for corruption. In Africa, and other poor regions, corruption is a huge impediment to decent economic and political governance.”
Paul Collier calls upon David Cameron to use Britain’s chairmanship of the forthcoming G8 summit in Northern Ireland to lead an international effort to crackdown on the corporate tax dodgers.
This is something we’ve all got an interest in. For instance, if African governments could raise more money through taxation and do more to curb corruption, they’d be less reliant on British foreign aid, as supplied by those of us who do pay our taxes.