Transfer mispricing

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transfer-mispricing

In a report for Jersey Finance, ASI Fellow Richard Teather challenges two reports by Christian Aid. These have formed the basis for wild claims of the effects of transfer mispricing that have permeated into the media. It may not have escaped you attention that the figure of 1000 children dying every day has been bandied about, as though it were an established fact.

Transfer mispricing is when related firms agree to overprice imports or underprice imports, in order to declare less profit and so pay less tax. Christian Aid’s statistics for the first report drew on the anecdotal evidence of a book entitled Capitalism’s Achilles Heel, which estimates that 7% of trade volumes is elicit capital movement, this 'fact' was based solely upon interviews. The second report is exposed to show that, even based on the reports dubious figures, transfer mispricing impacts markedly less on the tax take of poorer countries than claimed in either report.

More importantly, the faulty methodology of the reports is pronounced. Goods are considered to be either underpriced or overpriced, just for being less or more expensive than that of the mean. Considering that bicycles and Ferraris are judged to be in the same category when working this out, the accuracy of the results is highly contentious. There are also blatant data errors, that are acknowledged by the authors, but left in to work out that 1000 per day figure. For example, a phantom 7,000,005 shearing machines were sold by Turkey to EU in 2007. The result accounts for a great deal of supposed transfer mispricing.

All this means that Christian Aid’s claim that 1000 children per day dies of transfer mispricing can be reduced to 25. The report goes on to point out the fact that poor countries opening up their economies, FDI and the resultant trade saves thousands of children every day.

There is one thing that the report does not touch upon that I could add. Even if the governments in developing countries were to get all this extra tax revenue, I can see no evidence to believe that many of them would be spending it on saving the lives of children. Better to leaving the money in the private sector and push for further deregulation of what are still protectionist economies.