Matthew DeMello: I know we’ve asked you some variation of this as of a couple of years ago when we had you last on the show, but I think there’s been ample opportunity to make new observations in, in this area, but what mistakes do you see multinational companies making repeatedly?
Dr. Ednaldo Silva: Well I have to make a distinction between mistakes and bias. And I recall an expression attributed to (Johann Wolfgang von) Goethe, the German poet, that if you make a mistake once it may be a tragedy, but if you’ll make more than once, it becomes a farce.
So as a result, I don’t believe that the tax administrators of multinational corporations are engaged in a farce. So as a result, I’m going to withdraw the expression mistakes. But they do have a biased position. An advantageous position, and here, bias has a very technical meaning: It is a deviation from a desired or established position. And this bias incidentally is a position that has no place in science. It has no place in a fair discourse.
Matthew DeMello: Right.
Dr. Ednaldo Silva: So to claim that that is a bias position is to establish or to claim also that that is a position of inequity that exists here between the taxpayers and the corporate tax payers and the tax authority. So I think that the bias is expressed is aggressive attitude, this respectful attitude to the tax authority, because acts of aggression is an act of disrespect that to the counterparty.
And this is expressed in two sub categories: One is steady mis-characterization of related party transactions. And here we have a very unfortunate situation happening in United States, and I think is becoming global, in which we have a high fraction of intelligent lawyers and accountants and economists supporting bias position and taking positions that I regard as intellectually dishonest.
So mischaracterization of the transaction is a sign of the bias and the other one is the selection of wrong comparables. I mean, comparables that cannot in any sense of economic understanding, can be deemed to be comparables to the related party transactions.
Matthew DeMello: I don’t think you’d be alone in claiming that the field of economics is rife with biases that are intellectually dishonest. I think you’d be far from alone in that claim. So I’m sure others in our audience have some idea of what you’re talking about if only from experience.
Now, just turning to the subject of today’s show, we say developing countries and obviously this is a very, very loaded term whether or not we’re getting into official definitions, but maybe let’s establish one for the purposes of this program. What is an official definition we can use in which that designation applies to the countries we’re going to discuss today?
Dr. Ednaldo Silva: Yes. And if you permit me before that, let me short introducing addendum to what I said before about intellectual dishonesty.
Matthew DeMello: Sure.
Dr. Ednaldo Silva: Because in any discourse it’s important that we, we show good faith.
Matthew DeMello: Oh yes, of course. Especially in these times.
Dr. Ednaldo Silva: The official definition of ‘developing’, ‘under–developed’, ‘emerging’ countries is based on level of income. And we have three types of three groups of countries, depending on levels of income for our purpose, we can talk about two types of countries: Low income countries, and these are countries, in which the per capita income measured, and in current US dollars is up to $12,000 per year. And then you have high-income countries or countries in which the level of per capita income is equal to, or exceeds, $12,000 USD.
So obviously these groups are amorphous with respect to many attributes. What to me characterizes developing countries is the level of massive unemployment. What happens is that even though economics statistics, masks the level of unemployment in rich countries or high–income countries, and we have countries in Europe that are considered to be a ratio, but in which the level of unemployment is at 20 percent for around 20 percent, but we don’t see misery because of the social programs that exist. And developing countries, invariably, the level of an employment is 25, 30 percent of the working populations.
So for me, as an economist, the way to deal with these kinds of countries is to have the kinds of economics policies that are applicable to depressed economies. But unfortunately we are all colonized by US university education, which imposes a kind of thinking that is applicable to special cases and the enriched or developed countries in which full employment applies.
So this is really the big conundrum that we have. So, so the short answer to your question is that developing countries, the countries with low level of income up to $12,000 or had for a year, and that is characterized by massive unemployment.
Matthew DeMello: Where we talk about wealthier countries that have basically abject full employment. Is this what is meant by, in “the developed world” [that] unemployment is a figure but that might better represent folks who end up having to work two jobs or are ‘over–employed.’
Is that sort of what you mean? Like developed countries are countries with those kinds of employment problems rather than in developing countries, [where] if you’re unemployed, you are absolutely subject to the poverty line and below?
Dr. Ednaldo Silva: You’re destitute. So that families suffer all kinds of economic and subsequent or psychological distress. And that is by far the high frequency of the population. And I was just saying that, I know that speaking with me, we often go off script, but you know, I mean, what I find disgraceful, you know, as a trained economist is that all of this is a result of policy.
Matthew DeMello: Yes.
Dr. Ednaldo Silva: It doesn’t have to be that way. You always have choice that we, I’m not including myself in this way. You know, that elite thinking has imposed, you know, because poverty today is completely an excusable,
Matthew DeMello: Right. Definitely plays into what you were saying before about the kinds of thinking promoted in US universities and gets reinforced in a kind of groupthink way by academia that comes from these institutions. But most developing countries don’t have transfer pricing requirements, just to at least set that stage.
And of course it’s difficult to start anything from scratch. We’ve put a finger on this dynamic, just as much as we can in these first few minutes of the show. But put us in the shoes of these countries, if you can, what are usually like the main or major barriers to entry for developing countries starting transfer pricing regimes?
Dr. Ednaldo Silva: Okay. So, and one of the documents, I think we’ll discuss later, there is a chart that shows that 80 countries have transfer pricing regimes of one sort or another. So, you know, that’s about 59 percent of the 135 countries that members of the inclusive framework of the OECD. So that is a substantial fraction.
The major challenge — you may be surprised by this, the major challenge that these countries face is [whether to] acquiesce to the OECD mandate. And here, let me say something that you may find unusual: What happens is that increasingly we, as citizens who have become taxpayers, are subject to decisions made by officials who are not elected by officials who are not elected either appointed, for example, secretaries of treasury, secretary resolve labor, et cetera. But also by people who are employees or members of international organizations. You know, so I think that the biggest challenge that countries have is the need to be part of an economic system that is worldwide, but at the same time, to subject its local executive judiciary and legislative bodies to international mandates of people who have no understanding and no stakes, except as tax collectors in a broader sense of the word.
So this is what I think is the major challenge. Many of these countries that may not have transfer pricing regimes do have rules that cover intercompany transactions, but they are not rules under the Magna Carta, or the mandate, or the OECD language.
Matthew DeMello: Of course. And I mean, just with everything you were saying, at least giving an idea of the challenges that are faced by these officials, there’s kind of a reverse brain drain problem just in terms of having the know-how of how the international system works on the ground in these countries to start these offices and have that infrastructure.
And of course, in January, 2020, the platform for collaboration on tax released a toolkit for developing countries, entitled Practical Tool Kit to Support the Successful Implementation by Developing Countries of Effective Transfer Pricing Documentation Requirements.
Unfortunately that doesn’t boil down to a fun sounding acronym, so we have to read it the full way out… but what does the Toolkit aim to do? How does it help developing countries with no legislation in place?
Dr. Ednaldo Silva: It tends to summarize a series of events that must be followed to be part of this international tax community. And I can recall six or seven objectives or aims.
One is to establish international consistency with the OECD standard, which as I have said before is a US standard. Two is to make sure that there are primary laws dealing with related party transactions. And here, I go beyond transfer pricing because it also involves a thin capitalization rules. Although the document that we will refer it to doesn’t mention thin capitalization, it mentions related party transaction with respect to the transfer of tangible goods, the provision of services, or the transfer of intangibles. But to establish international consistency, to establish primary laws that are conforming with the OECD rules to establish exchange of information rules so that one of the requirements that’s expected, which is a country by country report and be shared between tax jurisdiction to clarify burdens of proof was respect to the corporate taxpayer or the tax administration.
The document is very concerned with confidentiality or the respect for confidentiality and here I really part company, but I’m not going to go there at this stage.
Matthew DeMello: Fair enough.
Dr. Ednaldo Silva: So six, the importance of establishing penalties for, omissions for misinformation, for failure to fulfill a required data for incorrect returns, for failure to maintain adequate transportation documentation. And seventh, is it’s simplification in exemption for small and medium-sized enterprises.
So if I were to put all these seven items, they are more, but now, these seven items that I found to be highlighted international consistency, primary law exchange of information rules, burden of proof, confidentiality, penalties, and simplifications, and an exemption, I would sing that lovely rhythm and blues [song], “The Thrill is Gone”.
Matthew DeMello: Oh, yes. Yeah. [Laughs.]
Dr. Ednaldo Silva: “I’m free from your spell…” I mean, there is nothing new here.
Matthew DeMello: Right.
Dr. Ednaldo Silva: And so the thrill is really gone. And as I said – “I’m free from the spell….”
What is interesting is that here we have a cavalry descending on developing countries constituted by four measure bodies: the IMF, which cannot play a leading role here because the IMF is historically a bad cop for developing countries. The IMF is the imposer of conditionality rules of austerity rules to make sure that this so-called ‘debt’ is serviced, that that is so-called serviced; that interest is paid on the debt.
Matthew DeMello: Of course.
Dr. Ednaldo Silva: So the interest of the IMF and this group of four is in my view primarily to make sure that there is enough tax revenue in these countries to pay the foreign debt. I mean, that’s the main interest. And then we have the fellow travelers, the World Bank. And the World Bank, as you know, was historically the bank that invested in infrastructure to make sure that developing countries were integrated in the world system.
Since a lot of infrastructure has been built, they are like bastard children.
Matthew DeMello: Yeah.
Dr. Ednaldo Silva: But they are there because they are part of the Troika that imposes conditionality and austerity, whenever countries cannot service that.
Then we have the UN, which is the wonder child has lost its place. It is today data collection, but even data collection has been taken over. And by the way, the OECD is a falling rapidly falling star without a clear role to play in the economic world economic system. And then we’ll have the OECD, which is an ascending star because it, you see, does not have the burden of the IMF. You know, the very bad reputation of the IMF.
It does not have the equally [tainted], but more discreet reputation of the World Bank. So the OECD’s playing the role of building cohesive forces of being the intellectual monitor of this process. So it is very confusing if you are a tax administration in a developing country, because you’ll face, the OECD with roles, you have the UN [with] similar but competing rules. You have the World Bank barking at their doors, and you have the IMF also being part of this gang of four.
So it’s very confusing. The document per se is repetitive, inelegant... That is nothing new. As I said, there are no thrills.
Matthew DeMello: Right. [Laughs.]
Dr. Ednaldo Silva: So I don’t have much positive to say because I only expect further confusion.
Matthew DeMello: Well, I will say with my background in global policy that you reflect a position of skepticism about these international institutions. Just to extrapolate from there, it seems as though that the purpose of this is to mainly try to get developing countries on board, principally with country-by-country reporting? You mentioned that there’s this show, you know, we’ve seen this show before, but that really seems to be the purpose of it here. Is that too cynical a view?
Dr. Ednaldo Silva: No, I think it’s correct. I mean, if you’re, if you’re going to summarize that is the minimum requirement and, you know, they mentioned four, but that is the only to my knowledge, the only minimum requirement that they keep insisting.
Matthew DeMello: Just looking at this tool kit, there obviously is good intention here, trying to take everybody on good faith. What does the toolkit mean for multinationals? What should they expect?
Dr. Ednaldo Silva: Well, I think it’s, it’s a sign of relief for multinationals that we have a consonance of views by two partners that have been in calmer, and then they are now part of the front room, namely the world bank and the IMF, because the UN has been playing second fiddle to the OECD in matters of transfer pricing for quite some time. I think that people at the UN had the aspirations of becoming the bespoken voice of developing countries and OECD the voice of a club of rich countries. But they recognize sooner enough that in a dichotomous world, with a dichotomous view, No, you either ascribe to the views of the dominant force or you’ll become heretic.
So they became a nullity because they cannot really expound the views of developing countries without falling into a heretic position.
Matthew DeMello: Right.
Dr. Ednaldo Silva: So I think for tax administrators of multinationals, it is relieving, you know, to see that they have two whipping boys come in to, to the rescue to establish this common, uh, language by the two wipping boys. I mean, one is really a nasty wipping boy, and that is IMF.
It should be called AMF, ‘A’ for austerity.