4.5.4 - contd Flashcards
Booklet ways to increase IC
- measures to increase occupational mobility, such as education and training schemes
- improve infrastructure
- privatisation
- encourage immigration
- competition policy
- incentives for invesmet like tax breaks if companies used profits for investment
Problems facing policymakers when applying policies:
o inaccurate information
o risks and uncertainties
o inability to control external shocks
how does inaccurate information affect policymaking
- Short term information, such as GDP figures for the previous month, are often inaccurate and so may mean that the government is
unable to see if there are problems within the economy. - Trying to cut down on tax evasion and avoidance is difficult as the government suffers and infor gap on the level of avoidance, who it is that is avoiding the tax and the best way to reduce it.
- BOE makes its decisions based on past data but it is possible trends in the economy may be changing so past data gives an inaccurate picture of where the economy is currently heading.
- With interest rates so low for such a long period, past data is unlikely to give an accurate representation of the current economic
climate which makes it difficult for the Bank to know which action to take. - Full cost-benefit analyses can be time consuming and costly and it is impractical for the government to gain every single bit of information they need
Risk and uncertainties in policymaking
- The government cannot accurately predict the future and so it is difficult for them to know whether extra spending is necessary etc.
- They can’t know the full impact of their decisions as consumers often react unexpectedly and this could undermine government policy. gov must manage risks
external shocks affecting policymaking
The government is unable to control and prepare for these external shocks; the best they can hope to do is lessen their impact. Since every situation is different, it may be difficult to know the best method to solve the problem.
Policies employed by policy makers may not have their intended impacts and it may
undermine current policies in place, for example Brexit has delayed government
plans to balance the budget
examples of external shocks interfering wiht policymaking
- during EU debt crisis, ECb raised interest rates twice bc worried about inflation despite huge issues facing banks and gov
- if they appreciate the full harm debt crisis would have they may not have raised rates
Measures to control global companies’ (transnationals’) operations: (Spec)
o the regulation of transfer pricing
o limits to government ability to control global
companies
Main limits to government ability to control global companies
- tax avoidance schemes are hard for EU to control
outline tax avoidance by TNCs in the EU
- legal tax avoidance schemes, such as the ‘Dutch sandwich’ and the ‘double Irish’, where costs, revenues and profits are routed through Ireland, the Netherlands or Luxemburg and then sent to a tax haven like the Bahamas or the Cayman Islands.
- It is suggested that for every £1 gained in extra taxes by Luxemburg, other countries are collectively losing possibly £1000 in tax revenues.
Solutions to tax avoidance
- extremely difficult as they require worldwide agreement.
- However, any solution which would benefit a country like the UK would lead to great
losses for countries like the Bahamas, Ireland and Luxembourg . - There is also division within countries , for example in the USA between the Democrats and Republicans.
- This division allows TNCs are able to prevent any agreement they do not like through immense lobbying. Any solutions are also time consuming and costly
How does transfer pricing cause tax avoidance
- a firm produces a good in one country and then transfers it to another to make it into another good which it then sells
- If taxes are higher in the first country than the second country, they can set a low
price on the product made in the first country. The overall aim is to increase their
profit made in the low tax country and decrease it in the high tax country and so
overall reduce their tax bill.
How have we attempted to combat transfer pricing through regulation
The Transfer Pricing Guidelines were introduced by the OECD in 1995, providing
guidelines on cross-border services, intangibles, cost contribution arrangements and advance pricing guidelines; these were modified in 2010. They aim for the price to be
the same as if the two parties were independent of each other; the ‘arm’s length’
principle.
Coca cola doing transfer pricing
- between 2007-2009, CC trasferred much of its IP to be accounted for in subsidiaries in low tax countries
- IRS (us tax authority) is taking legal action to mkae CC pay more tax to us
Amazone transfer pricing scheme
- amazon eu’s hq is in luxembourg where it effectively pays no tax
- it trasferred intangible assets like software, customer lists and marketing to its Luxembourg subsidiary charging $254 for its transfer
- EU and US tax authority argued this was too low and reduced Amazon’s tax bill by hundred of millions of euros
- Eu is appealing a recent ruling about this case in court
Other general examples of tranfer pricing
apple: in 2016, the EU ordered Ireland to recover 13 billion euros in back taxes from apple
starbucks: 2015 EU ordered the netherland to recover up to 30 million euros in back taxes from starbucks
