– DAGTVA explanatory documents about the calculation of transfer prices –
– Situation where a production State ‘A’ applies a VAT and CIT rate at 8% and a WSTAX at 4% on a transfer price to State ‘B’ which have standard taxation –
We first studied the situation of an ‘idealized’ transfer price, then presented the situation of a transfer price in a market State which applied a VAT and CIT rate at 8%, the reverse situation where it is the production State which applied a rate of VAT and CIT at 8% in order to see the consequences on the fiscal results for the MNE and the States in the context of the DAGTVA system.
Obligations to find a mutualised and international solution which carry out the restitution of sale taxes in market States, invite us to study this constraint that the production State must apply and use for this the framework of Wayfair Sale Tax in United States with an adaptation by the DAGTVA system.
After having already studied the situation of a configuration where the production State ‘A’ applies a WSTAX at 4% with standard tax rates and the market State ‘B’ which apply a TAX/VAT and CIT at 8% in this page: Distrib 8% WST 4% – 9
We are going to study the reverse situation where a fiscally non-cooperative State, with a TAX/VAT and a CIT at 8% , would apply or be obliged to apply a WSTAX .
Go to the tab ‘Prod. 8% WST 4% – 10‘ from Excel: egalisation_des_taxes.xls (1)
1 Note : to have a correct opening of the file, please download the document on your computer, for your convenience please do not open it directly.
We saw in the slide show in reference and in the situation of a WSTAX at 10% without tax competitiveness issue , that it is the ultimate consumer in the market state who paid the Wayfair Sale Tax. This provision allows a modest economy distributor State to respond to the injunction for the refund of a tax to a rich country, it is not this poor State which pays the tax but the rich State which is reimbursed on the basis of the tax. purchase of its ultimate consumer. The part retained by the State of production being the tax fraction attached to this production, with the consequence of splitting the total VAT to be collected into VAT to be collected on production and WSTAX.
I will not come back to this question ‘Why have a WSTAX‘ ? dealt with mainly in the page devoted to the configuration of calculation of an ‘ideal’ transfer price and in the page of explanations about a configuration where the State » A ‘applies a WSTAX at 10% with standard tax rates in both States.
Application of a WSTAX to the export in the example at 4% in D10.
We can already note that:
Production state ‘A’ with a rate of CIT and TAX/VAT at 8% :
WSTAX at 0% Tax Revenue ‘A’ = 210 – Tax Revenue ‘B’ = 833 – Diff = -623
WSTAX at 4% Tax Revenue ‘A’ = 168 – Tax Revenue ‘B’ = 907 – Diff = -739
Diff = -42 Diff = +74
A fiscally uncooperative State could argue that it does not submit to the injunction to apply a WSTAX but, the generalization of Wayfair Sale Tax as a support for the global tax system , as well as regulations in the European Union which go in this direction and will be applicable in 2025, and perhaps even before, will oblige the States to return the sale taxes on cross-border transactions and not only on the digital market!
Any jurisdiction that vould not carry out these sale taxes retrocessions as can be seen in the slide show in reference slides 22-23 and calculated through the intermediary of the WSTAX, could see the transactions blocked as in slide 22 or the import barcodes would not be produced.
We have already seen that the 137 States are reluctant to return their resources with these taxes included in the production tax.
We have also seen that ‘to return or restitute‘ means that we have taken something from someone that we are returning ! It is not the State of the seller that pays the sale taxes but with DAGTVA and the law in the United States, we only returned a part of sale taxes paid by the buyers.
With DAGTVA we separate and extract from the production tax (at the bottom of the invoice), the total indirect taxable amount so that, as equitably as possible, this production tax will be divided in what will be the consumption tax included in the sale price which shall be returned in the market State.
But the States with favorable taxation will have a big problem, they will have to return a high percentage of a tax recorded on a market price. A market state with standard taxation legitimately expects to be returned the share of sale taxes recorded in its market, so that the tax distribution must fairly balanced between the two states where the transaction takes place. States with favorable taxation will therefore have to return a significant part, sometimes higher than what they perceive locally and will end up only with low tax revenues from direct taxation from those local companies, MNEs or digital when they are localized at their home.
But to return sale taxes, tax havens will first have to collect them and this is what will force them to become taxable!
Let’s go back to the Excel table in the ‘Prod. 8% WST 4% EN – 10‘ and apply in D10 a WSTAX at 4%. We see that the indirect taxation of 123 has been divided into 2 parts 62 (rounded) to apply the same principle of calculating what must be returned. But in a situation where there is no competition on the fiscal level, we have seen in the ‘Transac-base EN – 6‘ tab, that the market State expects 165 must be returned to it with a fair share made with 10% of WSTAX, half of the TAX/VAT rate.
Between 165 and 62 of expected reimbursement, we have not achieved the right balance and the market State in its control of the transfer price will require that an addition to 165 be made.
The DAGTVA transfer pricing calculation system working for all states in the same way this process would possibly impose, as in the present case, on the transaction on State ‘A’ of production, for achieving a fair taxation on regard the law, a WSTAX at 7,66% to obtain the 165 of taxes that must be returned to the State of consumption, if this State of consumption has standard tax rates.
This would not be without consequences on the transfer price which would pass in D29 from 1540 to 1658, i.e. more than 7.66% (displayed rounded to 8) of increase which has repercussions on the taxation of profits but without impact on indirect taxation of the MNE which pays 118 in D40 with a TAX/VAT returned in I34 at 352 instead of 123 in D41 for 328 with a slight ‘bonus’ for the EMN of 20 for the taxed situation! While remaining inside a range of the arm’s length principle, from 3970 to 0.24%, the market price increases from 3,902 (4%) to 3,970 (7.66%) or + 1.71% . The direct taxation of the MNE on the transaction passes in D53 to 128 + 195 in I53 (invariable) instead of 107 + 195 with an increase of 21 in State ‘A’, the total CIT in State ‘B’ remaining unchanged at 195.
On the other sector, the tax revenues of State ‘A’, in these tax conditions, collapsed from 336 to 126 represented only by direct taxation with an obligation of fiscal transparency which will make it possible to know precisely the turnover of MNEs achieved in each jurisdiction!
It can also be noted that the tax revenues of State ‘A’ collapsed from 336 to 144 with a WSTAX at 4% and at 86 at 7.66% in the search for a fair response to the law on restitution sale taxes! What to discourage any tax haven from continuing in this way represented only by the consequences on direct taxation. With the obligation of fiscal transparency which will make it possible to know precisely the turnover of MNEs achieved in each jurisdiction!
The impact of a WSTAX at 7.66% imposed in production State’A’, in order to obtain a balanced refund of sales taxes in these conditions, would have an overall impact on the MNE of 6.95%. The MNE would then be penalized for wanting to produce in a low-tax State. Constraints responding, again, to option ‘Amount C’ of the OECD Pillar 1 document.
We made a first study of these transfer prices with DAGTVA. The tabs corresponding to re-imports of productions can be easily calculated with what has just been described. They are not represented and could in any cases impose an unacceptable default reference price compared to the market price.
You can get closer to the modified OECD Pillar 1 document with the links and comments that can be found in the various sections which are also accessible from the DAGTVA truth table (items inside automaticaly translated for the moment).