– DAGTVA explanatory documents on the calculation of transfer prices –
– Situation where the market State ‘B’ has a TAX/VAT and CIT rate at 8% –
We have just left the presented situation of an ‘idealized’ transfer pricing and entered into different fiscal and production parameters, in order to analyze the consequences on the fiscal results for MNEs and States in the context of the DAGTVA tax system. These results will evolve by modifying the variables in: ‘B’ and ‘A-B’. ‘A-B’ being automatically modified by the fiscal parameters of State ‘B’.
Go to the seven tab ‘Distrib 8% EN – 7‘ 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 following State ‘B’ fiscal parameters :
The variables modified for ‘B’ therefore ‘A-B’ are:
– The corporate tax rate: 8%
– the local TAX/VAT rate: 8%
All other parameters remain unchanged.
In production State ‘A’ :
Nothing changes, the WSTAX being at ‘0%‘ , the tax to be returned to the State of consumption not being levied on production as explained in the comments on the ‘Transac-base EN – 6‘ tab, the amount of the Wayfair Sale Tax is at ‘0‘.
In distribution/market State ‘B’ :
With these new parameters, the I54 margin ratio of 11.60% increases to 13.67%. The total CIT goes from 195 to 53, the profit after CIT from 500 to 490 varies little: 0,2%.
The market price is a little higher, it deviates reasonably only by 3.57% from the reference price, which could represent an equivalent local production, this difference, even if it is financially positive, remains to the disadvantage of the MNE facing a local production.
The market price remains within an arm’s length margin of less than 5% .
The differential of the margin ratio of 10.18% in ‘A’ – D54 and 13.67% in ‘B’- I54 shows only a difference of 3.50% in F54, still very balanced in favor of the subsidiary in’ B ‘.
After these first results, one might think that nothing has really changed, however it appears some important consequences:
A first drawback for the MNE which, even if it pays less total CIT with 203 instead of 266, with a differential of 63, overall gains less with 660 in K53 than a full local production at 821 in N53 with a differential of 161 to its disadvantage requires having a more complex management of the distribution of activities with a negative profit balance for the transaction at -98 compared to a complete local production whose profit-to-market ratio is 24.56%
A second disadvantage for the MNE with the compulsory payment of the transfer price by the subsidiary in ‘B’, which that will imply, as the WSTAX being at ‘0%‘, a levy in D40 of 330 of the TAX/VAT to be collected defined in D26. This VAT included in the payment can only be refunded in the purchase and deductible TAX/VAT of the subsidiary in ‘B’ up to the TAX/VAT rate of 8% applied in ‘B’ , i.e. 132 in I18. A refund differential lost of 198 on the transaction that will have to be included in an overall profit balance!
Third disadvantage for the MNE, the search for a fiscally advantageous state loses a little more of its interest!
Fourth disadvantage for the MNE. This problem will be all the more aggravating for MNEs which carry out activities in States which do not apply VAT!
As stated in the comments on the ‘ideal’ transaction , “MNEs will therefore have every interest in researching the type of VAT environment to be able to benefit from this full reimbursement of indirect taxation in the intra-MNE transaction. States which do not apply the principle of this reimbursement would be immediately penalized by MNEs which do not seek to establish themselves there, also forcing non-cooperative States to transparent taxation and here we enter into binding directives, by default as is stipulated for the pillar 1 ‘Amount C’. «
Despite these first four disavantages, under the conditions, the proposed table shows a situation which does not seem to give complete satisfaction, the MNE can still take the majority of its profits in what looks like a tax haven!
But it is not finished !
The first but not at least, the drawback for the State of consumption when it note that tax revenues of its State ‘B’ collapsed from 855 to 308, ie: 277% fall!
State ‘B’ is punished for the first time by applying the CIT and TAX/VAT rates at 8% .
State ‘B’ is punished a second time as explained above, they also penalize MNEs. These will hesitate to set up there to prefer local productions with equivalent taxation in the VAT environment.
Other findings :
As we saw in the transaction ‘ ideal ‘ in the left column of State ‘A’, the tax authorities of State ‘A’ will have to judge only the production part sold before comparing it to parameters extraterritorial rights over which, in the name of the free decision of the sovereign foreign states in question, they have no control. The control authorities of State ‘B’ having to judge, for their part, only the purchased production part and, perhaps by default, carry out a mutual and cross-check on the regulation of the declared transfer price that can be see in the slide show in reference slide 16. «
It is very possible that this decision to control the purchased part is not carried out by the tax authorities of State ‘B’, which is not fiscally cooperative. In this case the tax authorities of State ‘A’ may suspend the production of export barcodes and thus block the sales transaction until the problem is resolved. Here we enter a second time into binding guidelines, by default, as is stipulated for the Pillar 1 option ‘Amount C’ .
Another major disavantage for State ‘B’, it must be added that with a rate of WSTAX at ‘0%’, it then becomes out of the question to transfer a production tax corresponding to the VAT to be collected (in the environment VAT) to the State of the buyer or of consumption, especially if the State of destination is fiscally non-cooperative, which would be a double penalty for the State of production which would have to pay everything out of its own tax revenues.
We can see a total transparency of the taxation and revenues applied to the transaction.
Both States and MNEs will not be able to conceal these information!
We can now analyze the opposite situation where it is the State of production which applies fiscal parameters with a TAX/VAT and an CIT rate at 8% in the page: