Global tax shifting requires global solutions

Corporations earn profit worldwide, shift profit through the use of transfer pricing and therefore shift their tax payment to favourable tax jurisdictions. This leads to tax avoidance. The unfettered movement of capital makes transfer pricing possible and national tax authorities are unable to effectively prevent corporations from profit and tax shifting. This makes the reported profitability of transnational corporations (TNCs) a voluntary exercise by corporations as they control where they wish to declare their profits, if any, and therefore, where they wish to pay company tax. Transfer pricing is uniquely available to corporations and is the most common tax planning tool used by corporations. This chapter examines the size of the transfer pricing problem and demonstrates how simple it is for TNCs to engage in transfer pricing. The chapter recognises that in order for nations to effectively tax TNCs, nations have to make a claim to sovereignty as the authority to impose that taxation. Consequently, the chapter then examines the notion of ‘late sovereignty’ which allows for the exercise of sovereign power beyond national borders. The chapter concludes with a suggestion to tax corporations based on the formula apportionment of TNCs’ profits to deal with some of the problems caused by transfer pricing.