Trade Mispricing, which is a form of money laundering is the deliberate over-invoicing of imports or under-invoicing of exports by entities in a country, usually for the purpose of avoiding paying tax or levies in that country. In fact tax evasion constitutes one of the predicate offences included in the anti-money laundering legislation of most countries globally. In January 2012, the Organization for Economic Cooperation and Development (the OECD) published a guideline entitled "Dealing Effectively with Transfer Pricing". Useful checklist of risk indicators implying the occurrence of transfer price manipulation or trade mispricing include the following:
(1) Intangible assets utilized by group companies but no royalty paid,
(2) Cost sharing with no foreseeable benefit,
(3) Companies involved in transactions that might be overlooked,
(4) Companies making losses over a number of years,
(5) Sustained losses by local entities, but (overall) profits in the group,
(6) Margins suddenly decrease with no rationale,
(7) Companies with overseas subsidiaries with start-up losses,
(8) No formal agreement for services or finance provision with no recharge of costs,
(9) Secondments undertaken on “non-commercial” terms (i.e. no recharge and no agreements),
(10) Companies with related party transactions where the related party has a low marginal tax rate and makes payments which appear to be large in reference to the relationship,
(11) Debt levels, intra-group loans and guarantees that are “non-commercial”,
(12) Trading debtor balances – intercompany, long term, interest free,
(13) Dormant companies with intercompany creditors and net assets/investments,
(14) There are additional risk indicators flagged by tax authorities as requiring audit,
(15) Companies paying large management fees or paying royalties or other charges for the use of intellectual property, (16) Companies undertaking contract R&D on a cost plus basis – tax authorities may challenge the basis of remuneration and argue that a local country is contributing towards the creation of an intangible,
(17) Group members who have acquired, created or enhanced an asset that is used by other group members, perhaps by incurring expenditure on research and development leading to the creation or enhancement of intellectual property, (18) Companies with innovative business structures,
(19) Significant group reorganizations involving business transfers overseas,
(20) Transactions with tax havens or shelters,
(21) Companies in a commercial relationship with a related party where non-tax factors provide incentive for manipulation ,
(22) Loss making companies in commercial relationship with a lower marginal rate taxpayer where the loss is as a result of payments to that entity,
(23) Risks arise where transfer pricing policies and methodologies are not up to date and do not or no longer accurately reflect the operation and management of the business.
These are indeed useful indicators that researchers and anti-money laundering agencies can use to develop possible typologies for money laundering offences.
(1) Intangible assets utilized by group companies but no royalty paid,
(2) Cost sharing with no foreseeable benefit,
(3) Companies involved in transactions that might be overlooked,
(4) Companies making losses over a number of years,
(5) Sustained losses by local entities, but (overall) profits in the group,
(6) Margins suddenly decrease with no rationale,
(7) Companies with overseas subsidiaries with start-up losses,
(8) No formal agreement for services or finance provision with no recharge of costs,
(9) Secondments undertaken on “non-commercial” terms (i.e. no recharge and no agreements),
(10) Companies with related party transactions where the related party has a low marginal tax rate and makes payments which appear to be large in reference to the relationship,
(11) Debt levels, intra-group loans and guarantees that are “non-commercial”,
(12) Trading debtor balances – intercompany, long term, interest free,
(13) Dormant companies with intercompany creditors and net assets/investments,
(14) There are additional risk indicators flagged by tax authorities as requiring audit,
(15) Companies paying large management fees or paying royalties or other charges for the use of intellectual property, (16) Companies undertaking contract R&D on a cost plus basis – tax authorities may challenge the basis of remuneration and argue that a local country is contributing towards the creation of an intangible,
(17) Group members who have acquired, created or enhanced an asset that is used by other group members, perhaps by incurring expenditure on research and development leading to the creation or enhancement of intellectual property, (18) Companies with innovative business structures, (19) Significant group reorganizations involving business transfers overseas,
(20) Transactions with tax havens or shelters,
(21) Companies in a commercial relationship with a related party where non-tax factors provide incentive for manipulation ,
(22) Loss making companies in commercial relationship with a lower marginal rate taxpayer where the loss is as a result of payments to that entity,
(23) Risks arise where transfer pricing policies and methodologies are not up to date and do not or no longer accurately reflect the operation and management of the business.
These are indeed useful indicators that researchers and anti-money laundering agencies can use to develop possible typologies for money laundering offences.
