Quantera Global: Professional and practical transfer pricing specialists - Richard Slimmen
Quantera Global is one of the world's leading independent transfer pricing advisory firms, providing specialist services to multinationals of all sizes across the globe. The company's managing director, Richard Slimmen, discusses where transfer pricing ends and tax avoidance begins, and the challenges of navigating an increasingly complex regulator climate.
How does transfer pricing work?
Richard Slimmen: Transfer pricing is about achieving the right financial results within a group for all the companies involved in the transaction. That means, if you have a group of 50 or 100 companies spread across the globe in multiple countries, and they have transactions with each other, they have to pay each other for services rendered or products delivered. You may see transfer pricing as a necessary tool to establish proper financial reporting for the companies involved.
A group cannot operate without transfer pricing, otherwise it would result in a total mismatch of profit allocations between group companies. The challenge is in getting the right pricing for the right transactions identified.
If you do all that, but you have a goal in mind where you want to artificially shift profits to a location where they are not subject to tax, you start abusing the tool. If you have artificial transactions that do nothing to the business but are only tax driven, then it becomes a potential tool for tax avoidance.
That is in itself not linked to any tax haven by the way; from a transfer pricing perspective, if you have activities in a certain country, and these are real activities and real conduct and they are properly priced, that in itself shouldn't be condemned as tax avoidance. Whether a country decides to levy taxes or not is the sole autonomy of that country. Obviously people always have, at least, a drive to minimise costs - and taxes are costs. This might seduce companies to overstate income in low-tax jurisdictions.
How do base erosion and profit shifting (BEPS) rules factor into this?
It's a project initiated by the OECD and it's aimed at combatting tax avoidance. There are a lot of actions in the BEPS plan (which has 15 different ones), that do not relate to transfer pricing but a central part of them do involve it.
BEPS is aimed at combatting tax avoidance and abusive behaviour, and the abusive use of transfer pricing as a tool. This has resulted in a lot of measures tightening up the regulations, and to provide for a lot more transparency and a lot more uniformity in how to approach things on an international scale. Which should, at the end of the day, result in less abusive behaviour of transfer pricing. BEPS is not aimed at abolishing any transfer pricing, because that would not be possible. Still, sometimes certain media seem to suggest that companies should refrain from transfer pricing as if that tool alone would be the root of all evil. This shows a lack of understanding that easily leads to misinformation of the general public. The tool itself is not 'bad' (companies as well as authorities can not do without it) but it is the wilful abuse of the tool that can lead to tax avoidance.
What impact do issues like the Panama Papers have?
In order to be able to levy the appropriate tax, there is a clear need for authorities to be able to obtain a clear picture about what goes on within a company. As companies operate on an international scale, they cross borders - not just physically but also from a jurisdictional perspective. This results in additional barriers to obtain relevant information to properly evaluate intercompany transactions. A lack of information at the authority's side could facilitate the improper behaviour of companies.
Transparency, in that respect, has become essential and there have been a lot of measures in the past few years to increase the level of transparency about multinationals, about their transactions and what they're doing within the group to allow the authorities to make a proper evaluation of whether they see sufficient reported profits in their jurisdiction.
There are different measures to increase transparency, but what you see as part of the transparency package is a lot of focus on the abusive behaviour of letterbox companies that can be used to disguise what's actually going on. I think what you see happening in the Panama Papers may easily links to something like transfer pricing, because a lot of multinationals do have group structures that involve a lot of companies that can be held by, for instance, a Panamanian holding company. A lot of multinationals have a Panamanian company in their structure but that alone doesn't imply anything about whether or not there's something wrong with that.
About a year ago, we had a similar data leak from Luxembourg, which specifically related to tax files. It also involved the Luxembourg tax environment and the use of letterbox companies to avoid taxes, so there's a similarity but I think the Panama Papers are on top of the news because Panama is also used by criminals to hide cash and property, which is totally different than what's usually happening within a multinational enterprise that has to deal with transfer pricing.
If a Panamanian company is used in a corporate structure, this would usually be disclosed to the authorities. A Panamanian company will, in that respect, not be very different than any other company within a group structure.
However the focused media attention on Panama may have caused the general public to associate 'Panama' with criminal behaviour and tax avoidance. Therefore, international enterprises may be facing inquiries if they have Panamanian group companies. Even if there's nothing wrong, they may be forced to explain.
Do you sense that there's a degree of disagreement between different countries as to how best to crack down on avoidance?
There's a common understanding that tax avoidance and tax abuse is not to be tolerated, but the challenge is how to achieve that in a way that is balanced. If all the countries involved start thinking of their own measures to safeguard their individual position and achieve a reasonable amount of tax, companies could end up with 200 different approaches. That would likely result in facing double taxation of their profits. The focus, and I think the important part of the efforts made by the OECD and the G20 in the BEPS action plan, is on a huge international consensus to do something about tax avoidance.
This is, however, still something that is only, to a limited extent, resulting in hard law, so to say, where countries have committed to execute certain measures, and other parts of the action plan resulted in recommendations that need to be taken on a country-by-country level, which still may result in different approaches and difference levels of scrutiny, and a different compliance burden per country. So it is a good thing that the international consensus has been there to get rid of avoidance and abusive behaviour, but it'll be quite a challenge to see if all the countries will actually be able to come up with an implementation that would make sense, without making it overkill for compliance purposes towards multinationals.
The introduction of a specific diverted profits tax by the UK and Australia does however give rise to some worries in this respect. If more countries start implementing individual approaches to safeguard their tax base, this will substantially reduce the impact of the general measures that were internationally agreed.
What does this all mean for multinationals that need to navigate this risk exposure?
Context and consistency are critical. Due to the increase of transparency and exchange of information between countries, it will become even more critical for multinationals to establish a consistent storyline. There will be a lot of data shared with tax authorities and it will be essential to put that data in the proper context to avoid confusion and misunderstandings. Quantera supports multinationals in their evaluation of the data, and to establish a good and consistent storyline that is backed up with facts and data.