Professional Documents
Culture Documents
Transfer Pricing
Transfer Pricing
Chapter I
INTRODUCTION
Introduction
The current problems and possible solutions surrounding United States transfer pricing regulations are discussed and studied. The schemes large multinational companies are implementing to legally evade taxes are uncovered as the financial effects to the United States Treasury and government are becoming material. The benefits for these schemes are financially advantageous for corporations as they are able to report larger profits and higher returns for investors.
This is being done at the expense of US government. Corporations are finding ways to escape the high U.S. corporate tax rate and lower their global tax liabilities by allocating income to lower tax jurisdictions.
Introduction (Cont.)
Tax havens like Ireland or Bermuda are popular to have subsidiaries which hold a corporations intangible property. Five United States Tax Court cases concerning transfer pricing are studied and the outcomes are analyzed.
The current problems studied from these cases are, shifting intangible property, valuing intangible property, the arms length standard.
The possible solutions to these currents problems are by no means easy to solve and no one revision can relieve all the problems.
The arms length standard is the corner stone to the current problems and if the government can find a way to better enforce the standard or replace it, it will be a large step in the right direction.
CHAPTER 2
Current Situation
Transfer pricing is defined as the price charged between related parties for goods, services, or use of property. Transfer pricing is globally used by a large amount of companies and related enterprises to replicate cost allocations. It is a significant part for both the tax payers and tax administrators because cost allocations have a large impact on income, which ultimately determines a corporations taxable income.
By taking advantage of these foreign tax rates and exemptions, multinational corporations are lowering their international tax rates and reporting higher profits
The process
Entities:
A corporation is comprised of a United States parent company, a foreign principal and other foreign subsidiaries.
Responsibilities:
The foreign subsidiaries distribute and/or manufacture products The foreign principal holds the responsibility of making executive and investment business decisions. In addition, the foreign principal holds the intangible property which is the trademark, patent or property the business profits on. The U.S. parent company supplies marketing knowledge, supporting services and sometimes engages in domestic and foreign distribution.
Outcome:
This process leads to lower overall taxes and increased returns for the corporations investors. the U.S. Treasury is left with little return on their investments
Causes of Dispute
All transfer pricing disputes arise over the arms length standard principal. In court, corporations support related party transfer prices and allocations with unrelated transactions, believed to be within arms length Conversely, IRS argues that the unrelated transaction is not arms length because of a difference in quantity, market price, type of customer, packaging and other non-monetary factors. As certain transactions are unique and no comparable unrelated transaction exists Especially with transactions concerning intangible property. If the arms length standard is ruled violated by the Tax Court authorizes the IRS to adjust the income, deductions, credits, or allowances of commonly controlled taxpayers to prevent evasion of taxes or to clearly reflect their income.
CHAPTER 3
Google Case
Google has legally evaded $3.1 billion taxes through a process called Double Irish or or Dutch Sandwich. Google has dropped its foreign tax rate from 35% to a shocking 2.4% by shifting profits through Ireland, the Netherlands and Bermuda to take advantage of each countrys corporate tax laws.. Google entered into an Advanced Pricing Agreement with the IRS in connection with certain intercompany transfer pricing arrangements. The IRS has not charged Google with any wrong doing at this time and many other multinational corporations are engaging in similar activities.
IRS
Parent
Royalty
Google Barmuda
Subsidiary
An unlimited co.
Foreign Principal
Chapter 4
Chapter 5
Chapter 6
NSC Case(Cont.)
The issue presented to the United States Tax Court, IRS indicated one of the comparable transactions contained packaging terms that were materially different. The court decided that it is unrealistic that the transfer prices used would result in operating losses for the parent company while the subsidiaries incur high profits. The court made appropriate adjustments to bring the pricing closer to reasonable arms length standards. The court increased NSCs taxable income by $6.96 million, $2.54 million, $8.05 million, $13.54 million, and $9.51 million for the years 1978, 1979, 1980, 1981, and 1982.
DHL is a package delivery company. In 1979 DHLI was created in Hong Kong. DHL ran the United States business and DHLI/MNV ran the international business. In 1990, DHL granted DHLI to purchase the DHL trademark for $20 million, though, other firms had interest in purchasing DHLI/MNV. In previous offers the value of the trademark had been $50 million and $100 million. The IRS issued a deficiency notice trademark valuation.