– DAGTVA explanatory documents on the calculation of transfer prices –
Situation where State ‘A’ of production applies a WSTAX of 10% on a transfer price to State ‘B’ – Both States have standard tax parameters
Go to the first ‘Transac-base EN – 6‘ tab of Excel egalisation_des_taxes.xls(1)
1 Note: to have the correct opening of the file, please download the document on your computer before opening it, do not open directly.
With the horizontal cursor hide the other two columns.
As explained in the ‘ideal’ transfer pricing calculation: Why have a WSTAX ?
It is originally the expression of a % used to calculate the amount of what must be returned as sale taxes to obtain the division of the VAT/TAX to be collected which will not be reflected in the transfer price. Applied to export, this WSTAX is essential because it is what will allow the creation, regulation and standardization of the Wayfair Sale Tax in United States, where we saw in the MTC document, that many discrepancies persist on the application of this law. If the DAGTVA system should not process this WSTAX, as we will see in other tabs of Excel, the desire to obtain a balanced global taxation system would be called into question by its obvious inapplicability in the fifty federated States of United States which represent the first but also nearly a quarter of the world economy. What would not be conceivable either, is that the world’s largest economy should be excluded from a shared taxation system when it was precisely at the origin, with what the OECD and the United States are looking for, in the first place, to see the sale taxes returned in the States of consumption.
The Wayfair Sale Tax, it will be the heart of the new possible global tax system associated calculation DAGTVA transfer pricing and the slideshow by reference. This set could be the future base of the World Single Market. The subject will be commented on in detail as the presentations progress ».
Let us return to the application of a WSTAX to the export of 10% in D10.
Consequences in State ‘A’ :
We note that by putting 10% of WSTAX we realize that it is half of the % of VAT/TAX to be collected on the sale of 20% which was 330 in D26 is now divided into 2 parts equal to 165 in D26 and D27.
The obvious consequence is that a local VAT/TAX to be collected of 165 is applied and that the transfer price goes from 1650 in D25 to 1815 in D29 incremented by the same amount.
The WSTAX is reimbursed to the EMN in the payment of the transfer price in D33 which cancels out the increase of 165 in the transfer price previously observed.
As with a WSTAX at 0%, the indirect taxation in D40 + D41, without increase, is always equal to 330.
The WSTAX is neutral in this part of indirect taxation of the transaction.
Regarding the company’s results:
Logically the CIT on gross profit is unchanged at 150 regardless of the rate of WSTAX applied in the State of production!
With the credit of 165 included in the payment of the transfer price by the subsidiary of the market State, the receipts increase accordingly, which causes an increase in the original profit of the same sum from 170 to 335.
Yes, you read that right ! An export WSTAX increases local profit in State ‘A’!
It follows that the original profit ratio of 10.18% is increasing to 18.26% and causes the taxation of a residual profit of 6.26% or 21. The whole resulting in an increase in taxation direct from 150 to 171, which increases the profit after CIT from 170 to 314!
Profit over revenue increased from 10.18% to 17.11%. The exporting entity of the MNE is not going to complain about such a situation which turns out to be to its total advantage.
Note: If we wanted to perfectly balance the ratio of profit / revenue at 11.51% (in hidden tabs) that would apply a WSTAX to 1.52%. It should be added to the fact that the subsidiary in ‘B’ is obliged to pay the transfer price so that the MNE can export its productions and receives them in the market State, normally has no impact on the general accounts of the MNE, what comes out of the right pocket goes into the left pocket!
With regard to the tax revenues of production State ‘A’ :
The WSTAX was created in D10 and D26 in order to be returned to the market State from the D64 to be transformed into Wayfair Sale Tax in D67 to be returned in the form of credit in I67 in the State of market ‘B’.
We can see that the transfer of this sale taxes created to comply with American law is returned from a taxation authority to another taxation authority and in no case from a company. The MNE, which is not involved in the process of this part of the transaction, is a winner and will not oppose the application of this WSTAX. But there will be no ‘loser’ in this production part of the transaction because, if the production State has to refund this tax, it has collected the same sum in D41 and D65 whereas if there had been a WSTAX at 0%, i.e. no export tax, he would have lost double, in order to respect an American law, that is 330. Tax efforts are therefore shared at this level between the two States involved in the transaction.
We can add that the concept of VAT, even if it is mentioned on the invoice and in this “producer” column, does not yet have a real existence, we are still at the stage of taxing a sold production. The States which will have to apply the restitution of this production tax will want, as specified above, that the tax efforts be shared between States by returning only half of what is taxed (in this special example which not reflect a reality). It can be an argument to find an agreement on negotiations in other cases studyed in this proposition.
But State ‘A’ loses a little less than these 165 returned because it received 21 of taxable residual profits, i.e. 480 – 336 = 144.
Conclusion of the application of the WSTAX in the State of production, all can be relatively satisfied except perhaps, at the time, the tax authorities who had to return the Wayfair Sale Tax. They must think that they will also receive it from other States, this mitigating that! Automated clearing house would balance between that it was returned and received in taxes in each State, to send only the difference toward States.
But I hear from here the critics who say that it is the subsidiary of the EMN in the market state which paid for this advantageous situation in the production’ State !
Well that’s not true!
We will now look at the rest of the Market State transaction.
Make the two hidden columns reappear with the horizontal cursor of Excel.
Applying a WSTAX at 10% the transfer price goes from 1650 in D25 to 1815 in D29 and I18 , incremented by the same amount in State ‘B’.
The deductible TAX/VAT on the transfer price paid increases from 330 to 363 and if we add the 20 of deductible TAX/VAT on purchases in State ‘B’, 383 of TAX/VAT is returned to the subsidiary. As specified in the comments on the ‘ideal’ situation, out of these 383 , a levy of 330 in D40 and D41 (in State ‘A’) 165 are paid by the deductible TAX/VAT returned by State ‘B ‘on the purchase of the transfer price. We see that all indirect taxation of MNE in State ‘A’ is paid by restitution of that in State ‘B’.
With DAGTVA, it is the power of the VAT Tax System applied internationally inside MNEs.
It can also be seen in I49 that the initial profit of 500 is invariable whatever the rate of WSTAX applied in the State of production!
We can also see that the initial profit ratio varies very little from 11.60% to 11.01% being in both cases less than the 12% above which the residual profits are taxed, which does not modify the Total CIT which remains at 195. The profit after CIT is therefore invariable at 500. The profit / market price ratio is very little impacted by the WSTAX from 11.60% to 11.01%.
The WSTAX does not impact the direct taxation of the subsidiary with a total CIT which remains unchanged at 195.
Question: So who pays this in State ‘B’ the WSTAX ?
Answer: It is State ‘B’ which pays the WSTAX with deductible TAX/VAT , but which is reimbursed on the payment of the market price , by the TAX/VAT to be collected on the sale.
In no case does the subsidiary of the EMN pay this WSTAX ! MNEs should not be opposed to this system of taxation!
To check this, the subsidiary differential TAX/VAT pass from 660 – 350 = 310 to 693 – 383 = 310, nothing change, which lets say the WSTAX does not impact the indirect taxation of the subsidiary in the market State.
The market price remains within 5% of the arm’s length standard, admittedly with an increase from 3960 to 4158 in this in theorical context.
With regard to the tax revenues of Market State ‘B’:
TAX/VAT receipts go from 660 to 858 with the 165 of the Wayfair Sale Tax returned, i.e. a 30% increase! We will see in other tabs and sections that this very significant increase will be beneficial for modest economies.
With the WSTAX, the TOTAL CIT not varying to 195, the increase in total revenue from 855 to 1053, that is to say a good of more than 23.1% , is done only on the indirect taxation which is paid, ultimately, by the ultimate consumer in the market State.
To conclude on the consequences of this WSTAX , admittedly under balanced fiscal conditions, if it allows States to comply with American law, it has very little impact on MNEs. In fact, it is the sequencing of the DAGTVA process that allows a State to recover the portion of taxation that had escaped it until now and more particularly if this technical device is applied in B²C transactions on digital transactions by unknown consumers.
It is this sequence in B²C in another way that allows a final buyer to be taxed.
In this situation where states have comparable taxation, WSTAX is a solution that seems effective for all stakeholders.
We will now see how it applies in circumstances where States have different tax parameters and first and foremost when a market state has low taxation.
A configuration where State ‘A’ applies a WSTAX at 0% with standard tax rates and the market State ‘B’ with TAX/VAT and CIT rates at 8% :