Transfer Pricing and its Impact on Society: A Case Study Analysis

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TRANSFER PRICING AND ITS IMPACT ON SOCIETY
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Contents
Introduction................................................................................................................................3
Task A........................................................................................................................................3
Regulatory issues of UK government and its implication on tax avoidance..........................3
Task B........................................................................................................................................4
Concept of Transfer Pricing and Its Link To the Case study.................................................4
Impact of Transfer Pricing on Socio-Political, Ethical and Economical Context..................5
Conclusion and Recommendation..............................................................................................6
References..................................................................................................................................7

Introduction
In this current era of economic globalization, individuals and corporate companies
seek ways to get their profits within low or no jurisdiction in terms of laws of that country. In
this way, they try to avoid paying taxes. This is quite common in UK and US. In the
described case Shawn came up with an idea by following which they can launder their
money. In order to do so, he created a shell company with Ian with a local address. They then
lent money from Eva who has an intention of avoiding taxes. The company which Shawn and
Ian created, then invested money in Goodwill Net Pty. The interest received from that
company was then shown as payoff to Eva who again deposited that payoff money in the
company’s account. In this way, they are increasing the asset or valuation of the company in
order to avoid personal taxes.
Task A
Regulatory issues of UK government and its implication on tax avoidance
The Cayman Island is situated in the Caribbean sea under the jurisdiction of UK. This
is a small place which is strategically position itself as a fast growing financial capital. Since
there are no taxes implicated for personal income, capital gain or corporate profits, many
businessman, industrialists and individuals target this location in order to capitalize their
income in order to avoid government taxes. This is quite common in the UK. The people of
UK often establish businesses on Cayman Island or invest their money with a high rate of
interest. This is a practice they evolved which is causing a huge gross amount of tax
fraudulence. This mammoth amount is as equal as 7-8% of gross GDP of UK. This is
affecting the economic and social structure of the country. The government of UK has
declined all types of tax rates in order to reduce this kind of activity within the territory.

However, there are no sign of improvement till now regarding this matter. In case of
corporate taxes, the UK government has reduces from 52% in 1982 to 17% in 2017. But the
problem of shifting profit in order to avoid taxes is not being reduced rather, it has become a
major political problem within the country.
Task B
Concept of Transfer Pricing and Its Link To the Case study
When an owner of a company tries to avoid income taxes, it is seen that he/she may
create another company and try to increase the capital of the second company in order to
create a relatively larger capital gain. This process is followed by people in order to avoid
government taxes and is known as Transfer pricing strategy. As the capital gains of
companies are taxable at a lower rate than individual income or investment income, people
often tend to follow these procedures in the territory of Cayman Islands (Liu, Schmidt-
Eisenlohr and Guo, 2017). Moreover, there are no direct payable taxes applicable for all the
above-mentioned accounts at that location.
In the above-mentioned case, it has been observed that Shawn has created a shell
company at Cayman Island in order to avoid taxes that are applicable to his and Eva’s
income. They opened the shell company alongside Ian with the intention of avoiding taxes.
They took help of an agent who is specialized in executing these kinds of fraud activities.
Afterward, the company gave some amount of money as credit to another company named
Goodwill Net Pty Ltd at a very high rate of interest. By following this procedure Shawn and
Eva will be able to maximize the capital gain of the shell company that was created by Shawn
and Ian. The key objective behind the strategy is to avoid government taxes. According to
UK law, when withdrawn, taxes on capital gain is less than personal income or corporate

profit. Along with that, since there is no type of taxes applicable at the Cayman Island, they
chose that particular location as an idol place to execute the strategies.
Impact of Transfer Pricing on Socio-Political, Ethical and Economical Context
Effect of globalization not only help multinational organizations to expand their
business in foreign locations, rather it also enhance opportunity for the multinationals to
avoid paying taxes by shifting their business in other countries, where the income tax rate is
comparatively low. The effect of these circumstances can be directly seen on the social and
economical context within the society. In this regard, in order to justify this above-stated
aspects, it can be stated that over the years, it has been seen large number of global
multinational organizations have tried to reduce their tax paying by shifting the majority of
the income of the firm on development of other ongoing business projects. However,
majority of the cases, it has been noticed that large number of firms have tried to avoid
taxation by transfer pricing their taxable income in other country’s account. For example,
Starbucks have been found guilty for not paying taxes in a proper manner (Vos, 2018). Such
actions of the corporate companies can be accused as illegal offence and it also signifies
unethical conduct during the execution of business practice. In order to underline the prime
causes of such incidents or scams, it can be mentioned that poor auditing and conduction of
business practices in unethical manner usually lead such circumstances where the directors
and other board members are responsible for such issues.
As an effect of such issues, certain aspects can be seen such as inequality in case of
income, which is directly or indirectly creating an impact on the society (Marques and Pinho,
2016). Apart from that, such illegal offences are happening in our community, due to the
causes of irresponsible approaches of the responsible officials including government.
However, over the years, it has been seen that financial scams are continuously happening in
order to avoid tax pay, where several government officials are involved in exchange of a

bribe. Such incidents usually lead negative impact towards the society by leading unequal
distribution of income. Thus, it can be stated that transfer pricing is unethical for the
organizations those which are deliberately conducting such unethical practices during the
execution of business operation for tax avoidation (Schön, 2015).
Conclusion and Recommendation
Transfer pricing is one of the most popular way which people follow in order to avoid
payable taxes. This is a major issue that has been growing day by day within the territory of
the UK. In order to stop the laundering of taxable money in this unethical manner, UK
government should rectify their laws and keep track regarding all the businesses that are
operating within its territory along with Cayman Island.

References
Liu, L., Schmidt-Eisenlohr, T. and Guo, D., 2017. International transfer pricing and tax
avoidance: Evidence from linked trade-tax statistics in the UK. FRB International
Finance Discussion Paper, (1214).
Marques, M. and Pinho, C., 2016. Is transfer pricing strictness deterring profit shifting within
multinationals? Empirical evidence from Europe. Accounting and Business
Research, 46(7), pp.703-730.
Schön, W., 2015. Transfer pricing issues of BEPS in the light of EU law.
Vos, B., 2018. State Aid, Taxation & Transfer Pricing: Illegal Fiscal State Aid Granted to
Starbucks?. EC Tax Review, 27(2), pp.113-120.