4.5.4 - contd

Question 1

Booklet ways to increase IC

Answer 1

• 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

Question 2

Problems facing policymakers when applying policies:

Answer 2

o inaccurate information
o risks and uncertainties
o inability to control external shocks

Question 3

how does inaccurate information affect policymaking

Answer 3

• 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

Question 4

Risk and uncertainties in policymaking

Answer 4

• 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

Question 5

external shocks affecting policymaking

Answer 5

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

Question 6

examples of external shocks interfering wiht policymaking

Answer 6

• 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

Question 7

Measures to control global companies’ (transnationals’) operations: (Spec)

Answer 7

o the regulation of transfer pricing
o limits to government ability to control global
companies

Question 8

Main limits to government ability to control global companies

Answer 8

• tax avoidance schemes are hard for EU to control

Question 9

outline tax avoidance by TNCs in the EU

Answer 9

• 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.

Question 10

Solutions to tax avoidance

Answer 10

• 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

Question 11

How does transfer pricing cause tax avoidance

Answer 11

• 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.

Question 12

How have we attempted to combat transfer pricing through regulation

Answer 12

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.

Question 13

Coca cola doing transfer pricing

Answer 13

• 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

Question 14

Amazone transfer pricing scheme

Answer 14

• 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

Question 15

Other general examples of tranfer pricing

Answer 15

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

Question 16

What is the economic significance of transfer pricing

Answer 16

• encourages tax avoidance and evasion, reducing the tax base in many countries
• many governments are running large deficits and growing national debts especially in wake of pandemic (need to generate more revenue)
• development consequences - estimated that around 60% of capital flight from african countries is due to trasnfer pricing by TNCS, reducing african gdp and tax revenues needed to fund HD
• encourages race to bottom - all countries lower corp tax to attract firms
• issues eith equity especially where tax burden facing households is increasing

Question 17

intervention for transfer pricing

Answer 17

• require a joint venture or partial local ownership
• create legislation governing use of natural resources, enforce min wages (egypt raised NMW for TNCS from 41 to 72 euros a month
• enforce intl tax principle that profits are taxed where they are earned rather than where firm is HQd
• MAIN: THERE HAVE BEEN GLOBAL AGREEMENTS ON GLOBAL MINIMUM CORPORATION OF 15% FROM 2025 TO HELP PREVENT A RACE TO THE BOTTOM

Question 18

Examples of UK government responding to external shocks

Answer 18

• Following Brexit, interest rates were lowered to improve confidence but then raised to deal with inflation caused by the falling value of the pound.
• The chancellor has set aside around £3bn
  to deal with the effects of Brexit and around £35bn will be spent in order to leave the EU
• Changes in exchange rates can cause inflation within the country or could cause a fall in growth and a poor balance of payments, both of which the government can attempt to solve through various methods.
• Political instability in the UK or in other countries is likely to impact the economy, and will mean the government needs to take action.

Question 19

Examples of real world economic shocks

Answer 19

• 2008 GFC
• 2020 covid 19 pandemic
  -The 1970s Oil Crisis: A series of oil price shocks caused by geopolitical events significantly raised energy costs, leading to stagflation (a combination of high inflation and high unemployment) in many economies.
• The 2016 Brexit Referendum: The United Kingdom’s decision to leave the European Union created uncertainty about trade relationships and investment, impacting the UK and EU economies.
• The Dot-Com Bubble Burst (early 2000s): Speculative investments in technology companies led to a bubble that eventually burst, causing significant losses in the stock market and affecting the technology sector.

Question 20

factors causing an external shock

Answer 20

• natural disasters, finacial crises, political events, pandemic and health crises, tech advancements, energy price shocks, supply chain disruption