The Star Online: Business
The Star Online: Business |
- Reining in cross-border profit shifting
- Competition Act – ignorance is no excuse
- Malaysia's blue chips start week in the red
| Reining in cross-border profit shifting Posted: 10 Mar 2013 06:39 PM PDT A RECENT statement by George Osborne, the British Chancellor of the Exchequer, was given wide media coverage in the United Kingdom and elsewhere when he said that he wanted to see "international action" taken against multinational companies which engaged in "profit shifting". This was in response to the public outcry against Starbucks, Amazon and Google when it was found that the tax they paid on their UK business activities was a mere fraction of the overall profits they made from such activities. Osborne's statement gives rise to a number of pertinent questions: How do these companies shift profits in light of prevailing rules which are designed to obviate such acts? Why international action when it is British tax shortfall he should be concerned with? Why the exhortation now when global companies have been subject to these rules for almost a century? The case of Amazon highlights how profits are "shifted" and the international tax rules that are in play. Amazon revealed to the UK's Parliamentary Committee that all its European sales, including those to UK customers, are made by its affiliates in Luxembourg. Its UK affiliate operates the order fulfilment, customer support and logistics services and earns a margin for these services. Since these are low-margin businesses, the profits earned bythe UK entity are understandably low. The bulk of the profits from its substantial sales volumes are attributable to the Amazon affiliates in Luxembourg, a low-tax location. Amazon's business model thus exploits fully a number of key international tax rules. The first is the "separate entity" principle, which treats a company within a global group as separate and distinct from other companies in that group. By locating its server and website in Luxembourg entities, Amazon is ensuring that profits from sales to UK customers are attributed to these entities. Thus the separate entity rule legitimises the dichotomy of Amazon's business when the reality is that its high sales volume would not have been possible if it did not have the warehouses and other facilities in the United Kingdom. The separate entity rule, therefore, has the perverse effect of permitting the fiction of separate businesses. The second is the arm's length rule, which operates to complement the first rule. It requires that transactions between companies in a group are made at arm's length i.e. as if they are made with third parties. Amazon had not been accused of breaking the law so that they would have adhered to these rules in arriving at profits for each of its entities in the United Kingdom and in Luxembourg. Having done so, "it is difficult if not impossible to challenge the attribution of low profits to Amazon UK and high profits to Amazon Luxembourg" in the words of Sol Picciotto, an emeritus professor at Lancaster University and adviser to the Tax Justice Network, an activist group calling for greater transparency and fairness in tax systems. Chancellor Osborne's call for "international action" is because he knows that the rules he wants changed have become international tax standards. Taking unilateral action would not only be ineffective but could find global companies shunning the United Kingdom. It is somewhat ironical that the Organisation for Economic Co-operation and Development (OECD) has been tapped to drive this initiative by the G20 countries. Current international tax standards owe much to policies and rules initiated by the OECD and over the years substantial efforts have been made towards ensuring their wide acceptance. A cynic would regard to the accusation of "profit shifting" as incoherent since the OECD arm's length transfer-pricing principle had been designed to prevent just that. The OECD first issued its transfer pricing rules, termed guidelines, in 1979 with the current guidelines being issued in 1995/1996. Since then, they have been tweaked several times and today, some 60 countries have generally followed these rules. The global spread of these rules stems in part from the process of globalisation as well as the realisation that transfer pricing is a zero-sum game. Transfer pricing issues are really issues involving the split of taxes between two countries one where the selling company is located and the other where the buying company is; both being companies in the same group. Adherence to the universal arm's length rule will tend to avoid double taxation of profits on multinational companies operating in more than one country. This explains why it is in the interest of a country to adopt this rule if it does not want to be viewed unfavourably by investors. It is also a reason why multinational companies find it incumbent on them to play by these rules, but in a way which benefits them. They do this by locating subsidiaries in low-tax jurisdictions (the Amazon model) and justify this by claiming that they have a responsibility towards their shareholders legally to reduce the taxes their companies pay. Questions arise on whether these entrenched rules can be re-jigged in a way that will provide clarity and avoid giving greater discretionary powers to tax authorities. Clarity and certainty are what business investors look for and will turn their backs on where these are absent. Professor Picciotto, clearly thinks not and through the Tax Justice Network, strongly advocates the adoption of Unitary Taxation to replace the current international system. The unitary system first came into the limelight in the late 1990s and is still part of the California state tax system. Under unitary tax, a company operating a business line globally, as in the Amazon example, will have to report a single set of worldwide consolidated accounts to each country where it has a business presence. The overall global profit is then apportioned to the various countries according to a weighted formula reflecting say payroll, assets and sales. Each country will levy tax on its part of the world-wide profit so carved out. This system reflects the economic reality that multinational companies are usually "oligopolies based on distinctive or unique technology or know-how: they exist because of the advantages and synergies that come from economic activities on a large scale and in different locations. Treating each affiliate as a separate entity for tax purposes is impractical and does not correspond to economic realty", so says the good professor in his paper arguing his case. However, he also believes that the vested interest of the many specialists of the current complex system will make it politically difficult to bring in unitary taxation. What is clear is that the major economies, which at this time are all finding their tax coffers emitting the familiar twang of emptiness, are looking for quick fixes. It has been reported that the OECD is to draw up detailed action plans within the next six months. If the current international tax rules took almost a century to be accepted virtually worldwide, it will be left to the eternal optimist to think that radical changes will be quickly and widely accepted.
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| Competition Act – ignorance is no excuse Posted: 10 Mar 2013 06:33 PM PDT THE Competition Act 2010 (CA 2010) has been in force for over a year, and yet there are still a large number of businesses that are not complying with its provisions. Is this because they do not understand how it applies to their businesses or is it because they are part of an even larger number that still do not know of its existence. Either way, the Malaysia Competition Commission (MyCC) is concerned. The CA 2010 received royal assent on June 2, 2010, but did not come into force until Jan 1, 2012. This 18-month moratorium was deliberate as the Government wanted to give businesses sufficient time to understand the new law and to make any changes required to their business practices. The MyCC has worked hard to raise awareness and educate the Malaysian public, businesses and government on the existence of the CA 2010 and what it means. Since the beginning of 2011, the MyCC has conducted more than 60 seminars, targeted at a wide range of interest groups from SMEs to government procurement officers to trade and business associations. This advocacy work continues with SME and bid-rigging roadshows planned for 2013. In spite of this, many businesses still do not know of the existence of the law, while others believe it does not apply to them. These are worrying facts. Is it that those who attended the seminars have not distributed the relevant information or do they think that their counterparts will not be interested or it is not of their concern? To assist the public at large to understand the CA 2010, the MyCC has published four sets of guidelines explaining how key provisions of the legislation will be interpreted. For the man on the street, a Handbook for the General Public, a simplified non-legal guide to the CA 2010, was published last year. Efforts are underway to publish a Guide for Businesses, which will offer more in-depth information about how the provisions of the CA 2010 are likely to be applied by the MyCC, together with practical and case examples. Throughout this advocacy work, the MyCC has been stressing the need for Malaysian businesses to become competition-compliant. Yet a 2012 survey conducted by the Federation of Malaysian Manufacturers found that almost 20% had not taken any steps to comply with the CA 2010, albeit only 16% of businesses responded to that survey. Given the nature of the advocacy work and publicity that MyCC has undertaken, it is difficult to accept that businesses are not aware of the existence of the CA 2010. The MyCC is concerned that businesses, particularly small businesses, think the CA 2010 does not apply to them. This is something that is of particular concern as the CA 2010 applies to any entity that carries on a "commercial activity". This is a broad concept and will cover almost all businesses, big and small, in Malaysia. For small businesses, the burden of understanding and complying with the CA 2010 may seem insurmountable. This is where the trade associations can assist as they are the ones who are best placed to inform their members of the implications of the CA 2010 and help them to comply. If trade associations themselves need to obtain a better understanding of the CA 2010, the MyCC can assist. It is clear that many businesses do know about the CA 2010 and what it means. The MyCC received 12 complaints from businesses last year. It has five ongoing investigations, one request for a block exemption and two requests for individual exemptions. The MyCC is well-placed to continue to build on this initial work. Starting with only five staff members, the MyCC continues to grow in size and stature. It has recently opened its new office in Menara SSM at KL Sentral and now has a dedicated enforcement team. Although still in its infancy, it has already made its first decision, finding the members of the Cameron Highlands Flower Association to be guilty of price fixing. No other competition authority anywhere in the world made its first decision in its first year of operation. In Asean, it is way ahead of its neighbours. Vietnam took four years to make its first decision. Singapore took two years and Thailand still has not made a decision although its legislation has been in force since 1999. The MyCC has achieved international recognition for the work it has done in such a short time. The MyCC will continue with its advocacy work as it recognises the important role this work plays. However, businesses must step up and take responsibility for their own compliance with the CA 2010. Neither the Act nor the process of competition compliance should be feared. For those businesses that are not yet "competition compliant", the message from the MyCC is clear. Its "soft touch" approach to enforcement came to an end on Dec 31, 2012. From now on, the MyCC will be imposing penalties on any businesses that are found to have infringed the CA 2010, particularly the hard-core cartel provisions. Penalties can be up to 10% of worldwide turnover. Hard-core cartels (price fixing, market sharing, bid rigging and limiting production or supply) are the most serious infringements of competition law. In some jurisdictions these offences are considered criminal, punishable by individual fines and/or imprisonment. Perhaps some businesses will only take the CA 2010 seriously when the MyCC starts to impose significant penalties on those found to be breaching the law. The MyCC does not intend to be a toothless tiger and will not be sympathetic to any claim that a business did not know that the law applied. Ignorance of the law will not be an excuse. So do not be the first to feel the weight of the new law.
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| Malaysia's blue chips start week in the red Posted: 10 Mar 2013 06:32 PM PDT KUALA LUMPUR: Blue chips started Monday on a cautious note, with the FBM KLCI marginally lower, dragged down by Genting Bhd and KL Kepong. At 9.12am, the KLCI was down 1.01 points to 1,652.95. Turnover was 31.50 million shares valued at RM31.10mil. There were 84 gainers, 60 losers and 127 counters unchanged. Hwang DBS Vickers Research (HDBSVR) said riding on the ongoing liquidity-fuelled global equities rally, Malaysian equities -- notwithstanding its relative underperformance versus its regional peers -- could show short-term upward momentum. "But with no fresh catalysts in sight, and in view of the looming election risk, the sustainability of the market run-up remains doubtful. "Therefore, investors should consider selling into strength as we expect the KLCI to face resistance at 1,655-1,670 before sliding back subsequently towards the support area of 1,615-1,635," said HDBSVR. Carlsberg fell 26 sen to RM13.22 but with only 100 shares done, BAT was down 22 sen to RM64.78 while Lafarge Cement gave up nine sen to RM9.95. UMW and Genting fell eight sen each to RM13.80 and RM9.96 while Public Bank, Bursa and Hartalega shed four sen each to RM16.10, RM6.86 and RM4.85 respectively. Petronas Dagangan was the top gainer, rising 32 sen to RM23.60, Nestle added 20 sen to RM60.40, Keck Seng 19 sen to RM4.82 and RHB Cap 15 sen to RM8.35.
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