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A lot of my work is around corporate income shifting,
which is one way that companies respond to tax incentives globally.
So if you think of a company that has all of its income across all of its operations
around the world, it's going to be taxed on that income in each jurisdiction.
And so if there are different tax rates in different jurisdictions,
which we know there are, then it's in the best interest of a company from a tax
planning perspective to try to report more profits in low-tax jurisdictions and
less profits and high tax jurisdictions.
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I like to think of it as, first and foremost, an operational decision.
So where as a company do you put your footprint around the world
such that you're creating value in different jurisdictions.
And this is something that gets a lot of attention in particular with
intellectual property, patents, and things like that.
Putting those in low-tax jurisdictions, sometimes called tax havens.
And that allows a lot of the profits to move,
be reported in those low-tax jurisdictions.
But it's a broader analysis than just intellectual property.
It's all of the functions, risks, and assets of the company.
And so the operational decision is figuring out a tax efficient footprint.
And then on top of that, you can layer an accounting decision.
And that is, now that I put some patents in say, Ireland,
how much of a royalty do all of the other parts of the company have to pay
to my Irish subsidiary for the right to exploit that intellectual property?
And that fundamentally, it's an economic question, but
it gets into the accounting space of exactly how we want
to assign a price, called a transfer price, between these two subsidiaries.
And where does that allow us to report our profits from a tax perspective?
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There's a global set of rules, and each country has its own set of rules too for
how you're supposed to come up with what that price is.
And the fundamental principle that we operate in globally, not all countries,
but most countries these days is called the Arms Link Standards.
So it's supposed to be a price that you would observe out on the open
market between two completely unrelated parties.
So if you and I were transacting for the sale of shoes or whatever it is right,
that would be the price as long as it's at a similar level of the market.
So wholesale versus retail in a similar economy.
You can take into account nuances like, developing economies and
foreign exchange rates and things like that.
But it's supposed to be as if we're operating at arm's length.
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The problem with that Is that a lot of the services and
products that companies are transacting with amongst their own subsidiaries
are not the same types of things that unrelated parties transact.
So it's not often the case that a company that exploits its
own intellectual property around the world,
is going to also license that out to unrelated parties as one example.
Another example is you think of a CEO providing
high level strategic management for all of the operations worldwide.
That person is not also providing those services for competitors for example.
So it can be very difficult to observe an arm's length price.
And that's what provides a lot of discretion to companies,
to try to establish a price substantiated defend it.
But also a price that's going to work for best for them from a tax perspective.
And this is the big question that were seeing these days international,
a fundamental question about transfer pricing.
Should arm's length be the right standard or should it be
more closely aligned with where the physical footprint of the firm is.
So discounting intellectual property a little bit from how much it matters today,
and focusing more on where sales are made, where the customers are, and
where the actual employees are.
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It seems tempting, I think, for
countries to set their tax policies in a way to try to mitigate this on
a unilateral basis where they're acting on their own best interest.
But given globalization and
just the increasing amount of dealings that are happening across borders.
I don't think we get to a long lasting answer,
until we get countries cooperating trying to harmonize tax laws.
Doesn't have to be the same rate, but at a minimum,
we need to agree on how these cross-border transactions should be priced,
where profits should be recognized.
And until we do that, you're going to have companies and
individuals taking advantage of differences.
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There's a lot of research indicating that companies are shifting income.
They are making operational and accounting decisions to move
income out of high-tax locations and into low-tax jurisdictions.
What's interesting about one of the studies I have is that a lot of the other
research out there ignores one major tax strategy that companies can take.
And that is taking advantage of their subsidiaries with losses.
Which is a really, really important tax strategy to companies.
When we include this important strategy we find that
the size of the affect is actually much larger than we thought before.
Actually all of the research out there could underestimate the amount that
corporations are engaging in this income shifting activity by as much as 50%.
Which is a very big difference.
So there's a lot more of it going on than we thought and
it's a lot bigger than we thought.
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What does it mean to pay your fair share, whether it's a corporation or
an individual, what does that look like?
What does it look like to be a good corporate citizen or
a good citizen of your country where you owe taxes.
And it's a tough question.
Because companies have a profit motive.
They have shareholders that they're beholden to.
And there's a perspective, the shareholder perspective of the firm,
that companies should be maximizing value for their shareholders.
There's also a stakeholder perspective which is that we're all stakeholders in
this society that we've built and so we should all pay our fair share.
And I think the two perspectives aren't necessarily mutually exclusive but
it's very difficult to answer the question what is fair because
it's inherently subjective.
If we know that companies are doing this and
we can estimate how much they're doing it, and we're starting to look at some of
the consequences of that is, it's natural to ask what should the policies be.
To think about what could be done to mitigate the behavior if we think
it should be mitigated or just generally how should corporations be responding,
is there a policy tool that we can use to try to get that response,
instead of what they're doing now.
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