On Fri, 25 Jun 1999, Rakesh Bhandari wrote:
> Michael,
>
> I think this is an excellent question, though you are indeed missing the
> first three reasons given for transfer pricing by Tang, according to
> Mehrene Laurdee and Tim Koechlin. Are you suggesting (quite plausibly) that
> tax avoidance should override the first three reasons?
[Three reasons re-appended below]
Yes, that's exactly it. It seems that political risk is much lower for a maquiladora (1); joint venture partners aren't necessary (2); and step (3) seems to apply as much to domestic business as to foreign affiliates -- and since I'm assuming taxes are higher domestically, it seems you'd actually want to inflate your expenses at home rather than overseas -- the opposite of the procedure described here.
I can see how special Chinese or Vietnamese laws might make this different. But these are two countries that regulate multinationals much much more than is average in the third world. So while it might affect productivity stats in those countries, they seem badly suited to generalize from. They are exceptional cases, outliers. The situation in non-communist third world -- i.e., the vast majority of it, measured in terms of MNE investment -- would seem to encourage not only dissimilar behavior (on the part of the MNE's), but dead the opposite: it would to over-reporting production for tax reasons. And this undercuts their argument about a systematic underestimation of productivity.
Michael
>
> "1. To recover the cost of investment quickly, to avoid political and
> currency exchange risks
> 2. To shift profits to the parent firms before sharing them with joint
> venture partners in the host country
> 3. To inflate the cost of tech and equipment transferred to the MNE
> affiliate to obtain a greater share of equity investment and to increase
> the costs of fixed and intangible assets for tax purposes [Gabriel Kolko
> has noted the same practice in Vietnam--rb]
> 4. To reduce tax liabilities by shifting profits to low tax jurisdications."
__________________________________________________________________________ Michael Pollak................New York City..............mpollak at panix.com