Multinationals and Transfer Pricing
Alan M. Rugman, University of Reading
Prepared for "Prospects and Possibilities for the 2013 G8 Lough Erne Summit:
Trade, Transparency, Tax and Terrorism"
June 14, 2013, Belfast
Organized by the School of Politics, International Studies and Philosophy, Queen's University Belfast
and the G8 Research Group, University of Toronto
with the support of the United Kingdom's Department for Employment and Learning, Newsdesk Media
and the Balsillie School of International Affairs
This conference was streamed live here. Watch the video here.
To find out more, please click here.
The public policy concern that multinational enterprises (MNEs) use transfer pricing (and other internal market mechanisms) to avoid paying their fair share of taxation is analysed using basic principles of international business theory. The following international business (IB) principles are used:
[back to top]
Current UK government policy criticises MNEs for not paying sufficient tax on their UK operations, for example, Google, Amazon and Starbucks are all said to minimise their tax payments in the UK (although their policies are entirely legal). Margaret Hodge, MP, states that their activities may be legal but immoral. This is false reasoning.
The three MNEs are legally permitted to declare their EU regional head office in any one member state. Google runs its EU operations from Ireland; Amazon from Luxembourg; and Starbucks from Holland. They are required to declare profits across their EU subsidiaries to be consolidated at their regional head office. Thus there is no legal reason for the UK to demand disclosure of their UK operations. This would only be applicable if the UK were to withdraw from the EU.
A similar nonsensical argument, advanced by Oxfam, suggests that UK owned firms do not pay enough tax in developing economies in Africa and Asia. This is the logical reverse of the Margaret Hodge "MNEs are immoral" argument. The foreign subsidiaries of UK MNEs pay the appropriate legal taxes required by host governments. It is the failure of host governments to harmonise their tax policies (thereby creating capital market imperfections) which leads MNEs to create their own efficient internal capital markets. For example, Nguyen (2013) demonstrates that UK MNEs in South East Asia promote host country economic development through the use of internal funds in the face of chronic host country capital market imperfections.
[back to top]
Penrose, E.T. 1959. The Theory of the Growth of the Firm. Oxford University Press: Oxford.
Penrose, E.T. 1995. The Theory of the Growth of the Firm, 3rd edition. Oxford University Press: Oxford.
Rugman, A.M. and Verbeke, A. 2002. Edith Penrose's Contribution to the Resource-based View of Strategic Management. Strategic Management Journal 23(8): 769-780.
Nguyen, Q. T. K. 2013. Can British multinational enterprises finance economic development in South East Asia? Multinational Business Review, forthcoming (2013).
Rugman, A.M and Eden L. 1985. Multinationals and Transfer Pricing. Croom Helm Limited: Kent.
[back to top]
|This Information System is provided by the University of Toronto Library and the G7 and G8 Research Group at the University of Toronto.|
Please send comments to:
This page was last updated June 14, 2013.
All contents copyright © 2018. University of Toronto unless otherwise stated. All rights reserved.