In the global market today, several key elements of an organisation's processes such as services , intermediate products and finished goods are constantly moved across one or more of its subunits and subsidiaries. The negotiation and establishment of the price of the transaction is known as transfer pricing . The process has historically and mostly been used as one of the many methods that companies' 'cheat the system' by taking advantage of lower tax rates in their subsidiary's geographical location, thereby increasing balance sheet profits. In this article, I explore how De Beer's used transfer pricing conjointly with volume manipulation, strategic marketing and anti-competitive practices to increase future profits.
In an effort to control prices buy manipulating supply De Beers created distribution arms through "The Diamond Syndicate," including "The Diamond Trading Company" in London and "The Syndicate" in Israel. The polished diamond market is a free, competitive market with multiple sellers and buyers. Economic factors such as economic growth rates in consuming nations, employment, disposable income and foreign currency rates have a much greater influence on polished diamond prices than does the DTC.The major difference between rough and polished diamond prices is that the latter are more dependent on supply and demand. If the demand is high and supply is limited, buyers will be forced to purchase rough diamonds to generate new supplies of polished stones. (Department of Mineral Resources 2012:27).
The De Beers group opposed all cutting of diamonds in Namibia and structured itself to avoid tax and move minerals though a worldwide web of companies each of which added costs and subtracted profits in order to maximise De Beers returns abroad. The company had so effectively colonised the government mining department supposedly responsible for regulating it, that the top government mining officials didn't even know the name, never mind the detailed terms of the law they were supposed to enforce. This put De Beers in prime position to abuse the mine, overexploit the diamonds by grade and stone size for many years while the cartel's friends in politics in Britain, America and South Africa delayed independence for Africa's last colony. In this way De Beers shortened the life of the mine and took away an extra billion pounds worth of diamonds ahead of Namibian independence. With working costs at 25% of revenue this means that the company plundered £750 million in excess profit and unjust enrichment from a poor country heading for independence.
In order for corporations to avoid legal consequences and prosecution from illegal transfer pricing, such as for tax evasion purposes, corporations would often have to verify that the transaction was an 'arms-length transaction'. This means that they would have to provide substantial evidence to prove that the set prices would remain the same had the transaction involved unrelated entities. The inability of De Beers group to provide such evidence, in addition to other legal issues has led to the decline of the company's role in the supply of the rough diamond market due to several sanctions and requirement imposed on the company.
*Note: This is study material for my upcoming exam in my master's program, proper citation and referencing would be provided as soon as my availability permits.
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