Total football and TP

Originally published: February 2024

In the 1970s, Dutch teams revolutionised the sport of football through a tactic known as “total football” (https://lnkd.in/gUZ_W7hD). Previously, teams let their players play on fixed positions, except defenders which often played man marking. But under “total football”, players would roam around the field exploring opportunities where they arose, luring away defenders from positions, creating gaps in the defence and then exploiting them. Innovation and creativity was everyone’s responsibility.

If you run a complex MNE, you would typically like everyone to feel joint responsibility for the company result, think about the larger whole and sometimes suggest improvements. You want to reward going above and beyond the job description. Not all this will add value, but it makes employees feel appreciated and sets them up for more value adding innovation in the future.

But the tax team could come and ruin it all. Transfer pricing (TP) policies need to each entity to stick to their described role. If local staff dabbles into a bit of R&D, they would create an argument for local tax authorities for a different TP method. So, you could have the tax team telling people to “stick to your job”. This will simplify the TP, as profits end up in the locations where the tax team had planned them to. The Amount B guidance that came out this week (https://lnkd.in/gp5dS5nt) creates even more payoff for keeping manufacturing, sales and distribution functions simple. But if teams don’t get the opportunity to experiment with low value add innovation, there is no natural path of them growing their role beyond their routine functions.

The resulting TP uncertainty and complexity means allowing experimentation in the periphery requires big pay off to be worth it. So, MNEs would be rational to close down potential innovations to limit TP risks. This concentrates innovation at preagreed spots, which are likely to reflect existing economic power structures (except if tax planning for R&D incentives has shifted this to certain locations). Because most innovation happens in developed countries, TP policies will require most future innovation to happen there too. So, while the guys at the headquarters get to come up with all the exciting new products, the creativity of those away from the centre gets fenced in (https://lnkd.in/gc9C6QQa).

Amount B creates simplified tax rules for more simple facts, creating a further incentive for taxpayers to simplify their facts by assigning players to fixed positions and responsibilities. TP is hard and anything that makes compliance is easier will be welcome. But could we not design better working TP rules for when high value adds are created everywhere in the world?

Obvious disclaimers: this is not advice. These views are my own and do not necessarily represent my employer.

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