Arms-Growth Method

creating a tax advantage and ultimately booking profits which have been artificially manipulated, in a low or zero rated corporation tax rate, country or tax haven.

In an international tax perspective three areas of concern arise: globalisation, the opportunity for companies to manipulate their profits through transfer pricing arrangements and the protection of national tax bases from profit shifting and hence the erosion of the tax base as companies don’t pay their fair share of tax.

Most tax authorities will have rules regarding transfer pricing arrangements and where possible the market value or ‘arms- length principle’ will be applied. Where disputes as to the value arise, they are normally settled by negotiation rather that protracted

Communications and pharmaceutical companies use this method as there is a high degree of vertical integration i.e. the company supplies everything from raw material to finished product.

Cost sharing agreements (CSA) are common in companies where there in s substantial research and development costs associated with the development of intangibles such as Intellectual Property (IP). Both the US and OECD have issued guidance on cost sharing. The basic idea is to ignore arms-length policy and the CSA looks “at the recharge made to other group companies for services carried out by one or more group members on behalf of the whole group”. (Miller and Oates 2011, p438)

Transfer pricing rules also apply to intercompany loans and in particular the rate of interest charged. If a company issues loans to a member of the group and then charges an interest rate above an arms-length rate then the deductibility of the interest is examined and if found excessive can be reclassified as a distribution and therefore not allowed as an expense in the payers accounts and treated as income in the company advancing the loan. This is particularly true if there is a high debt to equity ratio and is known as thin capitalisation. MNC’s are tempted to flood subsidiaries with excessive amounts of debt in high tax countries and reduce profits accordingly. This

However, they need to balance this and not be so draconian that they discourage foreign direct investment (FDI).

Anti-Tax Avoidance Directive:

The focus anti-tax avoidance directive (ATAD) issued by the European Union (EU) is to address mismatches between member states in the EU. Member states now want to address mismatches between member and non-member states known as hybrid mismatches.

Common Consolidated Corporate Tax Base:

The common consolidated corporate tax base (CCCTB) is a proposal aimed at having a single set of rules to be applied in calculating taxable profits throughout the EU. It is expected that compliance will be mandatory for large MNC’s who have the resources to engage in aggressive tax planning. Dealing with profit shifting loopholes, encouraging companies to raise finance through equity and granting tax incentives for funding Research and Development activities which are linked to economic activity. European Commission (2017) states that “the CCCTB will eliminate mismatches between national systems which aggressive tax planners currently exploit. It will also remove transfer pricing and preferential regimes, which are primary vehicles for tax avoidance