The United Kingdom advocacy group Tax Justice Network–which focuses on the harmful impact of tax avoidance, tax competition and tax havens–describes transfer pricing as "one of the most important issues in international tax." The network says it occurs "whenever two companies that are part of the same multi-national group trade with each other."
For example, when a Brazil-based subsidiary of an international energy giant buys something from the T&T-based subsidiary of the energy giant and the parties establish a price for the transaction, that is transfer pricing.
The tax advocacy group adds: "Transfer pricing is not, in itself, illegal or necessarily abusive. What is illegal or abusive is transfer mispricing, also known as transfer pricing manipulation or abusive transfer pricing. (Transfer mispricing is a form of a more general phenomenon known as trade mispricing, which includes trade between unrelated or apparently unrelated parties � an example is reinvoicing.)"
According to the Tax Justice Network: "It is estimated that about 60 per cent of international trade happens within, rather than between, multinationals: that is, across national boundaries but within the same corporate group. Suggestions have been made that this figure may be closer to 70 per cent."
Former Finance Minister Winston Dookeran, in delivering the 2012 budget, placed the issue of transfer pricing squarely on the national agenda when he said: "Transfer pricing regimes are becoming common features of tax legislation in developing, emerging and advanced countries.
"The issue of being able to verify revenue has become increasingly critical in jurisdictions where large multinational corporations operate. Most countries have adopted the principles of "The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" developed by countries of the Economic Co-operation and Development group.
"Recently T&T became the 102nd member of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. In order to converge to best practice, T&T proposes to include a transfer pricing regime based on the principles embodied in the OECD guidelines."
The 2012 budget was delivered by Mr Dookeran on October 10, 2011.
Just short of three years later, in an interview with the Business Guardian the week before the 2015 budget, T&T's Minister of Finance Larry Howai said that he had received the first draft of a report on tax reform from an international organisation that he did not name.
"They have identified what we need to do. There are a couple of big areas that I need to start regularizing, where I am having some challenges, over and above the normal challenges of tax collection.
"A big issue I have transfer pricing, which I think has a significant impact on our income. I have just done a Note for Cabinet to give me the approval to proceed with the hiring of some consultants to help me put a transfer pricing mechanism in place. And that's big money; at least $2 billion a year in loss revenue, we estimate."
Asked by a Business Guardian journalist whether he was referring to energy companies operating in T&T, Mr Howai said: "We think that there are a couple of them that we need to pay some attention to."
Asked whether these international energy companies establish subsidiaries in low-tax jurisdictions and send monies earned in T&T to those low-tax regimes, Mr Howai said: "I think it is a big leakage and if we could plug that hole it would be quite significant for us. So that's a big one."
Now, Mr Howai's answers, as usual, are quite revealing:
1) The fact that he is able to put the number of $2 billion on the amount of tax revenue that it is estimated the Government is losing from transfer mispricing is quite interesting, as is his reference to it being a "big leakage" that would be "quite significant" for revenue collection by the Government;
2) It is also noteworthy that the Finance Minister has an idea of the number of companies (a couple) that may be depriving the Board of Inland Revenue (and the taxpayers of the country) of revenue as a result of practices that the Government "need(s) to pay some attention to."
If the minister is to be taken literally, the question needs to be asked: Who are the two or three companies that are engaging in practices that are costing T&T taxpayers about $2 billion a year.
The issue, of course, is if the issue of transfer pricing has been identified as a "hole" that needs to be "plugged," why has it taken the Government almost three years from the point when Mr Dookeran outlined the policy agenda in the 2012 budget to get around to considering the appointment of consultants to address the problem?
If an estimated $2 billion a year in tax revenue is being lost as a result of transfer mispricing, is the Minister of Finance aware that the three-year delay has cost the country $6 billion.
And if it takes two more years to implement a transfer pricing regime, will the country not have foregone $10 billion in revenue from the time the idea was floated to its inception?
In delivering the 2015 budget, Mr Howai said the following: "We are continuing our focus on modernising our tax administration through the application of technology and enhanced taxpayer engagement to improve the efficiency of tax collection.
"Over the past year, notwithstanding that some of our objectives for the year were affected by industrial action, we have completed the review of the recommendations of the consulting group hired to assist with the review of our taxation system, we have established a taxation committee which includes stakeholder groups from the business and accounting communities and we have resuscitated the Petroleum Pricing Committee.
"With respect to non-financial assets, the mapping and valuation process has begun on fixed assets such as buildings, machinery and equipment, land, roads and sub-soil assets as well as contracts, leases and licenses.
"This exercise will provide further options for revenue generation and more effective."
How does Minister Howai's statement that the Government is continuing its focus on improving tax administration with a view to enhancing tax collection square with the proposal that the Government would offer "a tax amnesty for tax penalties and interest for late filing of returns and late payment of income, corporation tax and Value-Added Tax, as well as business levy and environmental levy."
Do the repeated tax amnesties–four in the last dozen years–and the continued delay in the implementation of a transfer pricing regime contribute to moral hazard by large companies and wealthy individuals who may feel that the price of non-compliance is to make some token payment during the amnesty period?
In your Sunday BG: The EY forum on transfer pricing