The small and rather cheap electronic device that runs the washing machine in your house was quite probably manufactured at the other end of the world; indeed the washing machine may well have been put together from components originating in a number of geographically remote places. This is so normal by now that it is scarcely worthy of comment. But it has only happened because of a number of parallel developments which have transformed the business world in the last 50 years:

• The rapid elaboration of global electronic communications, culminating in the arrival of the Internet;
• Improvements and innovations in air, sea and land transportation;
  Economic development in emerging nations, both pushing and pulled by international business trends;
• The emergence of global capital and financial markets and the collapse of inter-national exchange controls;
• The development of multilateral organizations such as the WTO which enable and in a sense 'police' global markets;
• The discovery by rich country Finance Ministries of business as a source of tax revenue, and the comcomitant efforts of businesses to minimize their tax burdens.

It's only the last of these, and then only a part of it, that is the subject of this report, but it is worth remembering as one studies the tax-efficiency of global business networks that they form an embedded part of an intricate mosaic with many inter-dependent aspects.

Although the Tax-Efficiency Quadrille danced by businessen and their tax inspectors was occasionally performed in the first half of the 20th century, it reached its peak of popularity and flexibility of expression during the 50 years after the Second World War.

As the taxing authorities cranked up their demands on business, so tax planners took advantage of the other trends listed above, and these years saw the emergence of low-taxing offshore and onshore jurisdictions as a base for holding companies, together with the use of so-called 'transfer pricing' techniques to arrange that profits fell where they would be taxed as lightly as possible.

By the 1980s, the tax authorities has begun to shed their Inspector Clouseau costumes, and a battery of unpleasant weapons, including withholding taxes and Controlled Foreign Company legislation, was wheeled up to confront the tax planners. Generalized anti-avoidance legislation rapidly followed, and the 1990s saw the deployment of Political Correctness, as high-taxing countries ganged up through the OECD and the FATF, using money laundering and terrorist financing as two potent symbols in trying to browbeat low-tax jurisdictions and the companies who use them into acceptance of tax as comparable to motherhood and apple pie.

In the early years of the 21st century there has more or less been a stand-off. The OECD countries have not won their moral crusade; but through a variety of technical means they have severely constrained the ability of businesses to escape home-country taxation.

Transfer pricing is identified in Ernst & Young’s Global Transfer Pricing Survey (the 2005-06 version of which can be found here) as the most important international tax issue faced by multinational enterprises. 86% of parent company respondents and 93% of subsidiary respondents tagged the issue as their primary international tax issue. Half of "parent" multinational companies have undergone a transfer-pricing audit somewhere in the world in the past three years. One-third of completed audit activity resulted in adjustments. 40% of respondents report that transfer pricing adjustments resulted in double taxation.

The purpose of this report is to examine the global and national landscapes in which companies can use transfer pricing to improve their after-tax returns; but it will be necessary to give summaries of the present status of 'offshore' and to describe the spread of DTAAs and CFC laws before doing that.

The full report is available in two formats:

Single purchase report | Intelligence service