The company has offered taxation, bookkeeping, and payroll services in addition to
clients’ representation at a variety of audits conducted by IRS, CT DRS, CT Department
of Labor, and insurance companies. The experience I have gained over the years has
helped me with a new role as a Revenue Examiner at CT DRS/ Corporate Tax Audit Unit
that I have started last year. I believe the knowledge of accounting and tax law that I have
acquired by taking all the courses at SNHU has not only improved my work skills but can
potentially help me with preparation for the CPA exam.
a As tax treaties regulate which country will impose tax on income from operations in
both countries to lessen the tax burdens, there are also rules designed to minimize tax
avoidance through international tax planning. Applicable to multinational corporations,
transfer pricing rules regulate how companies price the goods and services and allocate
earnings among affiliated members (Tax Foundation, 2023). Nonetheless, companies tend
to take advantage and charge higher prices to divisions in high-tax countries to reduce
their profits while assessing a lower price on affiliated members in low-tax countries. By
doing so they are shifting tax liabilities to low- cost tax jurisdictions while hoping for
adjustment to their tax liabilities once selected for an audit as financial reporting of
transfer pricing is being closely monitored by tax authorities. In case inconsistencies are
discovered, IRS is authorized to make any adjustments to financial statements to prevent
tax evasion resulting from charging inadequate prices to one’s affiliate members for
selling goods and services as part of intercompany transactions, as per Section 482 of the
IRC (26 USC). Nonetheless, the question is whether IRS’ auditors possess enough
knowledge and expertise to conduct convoluted audits involving transfer pricing.
a Per Worstall, corporate taxation is due where the economic value is created, and once
the economic value is created it can then be taxed (2016). However, the U.S. tax system is
inadequate to determine the value of the intellectual property, such as research, patent,
royalties, etc., claims Worstall. That creates concern and injustice among big tech
corporations. For example, Facebook has received a Notice of Deficiency back in 2016
upon moving its assets to its foreign subsidiaries at a lower value to avoid paying higher
taxes, which can result in significant tax liabilities including interest and penalty upon the
completion of the IRS audit. On the other hand, it’s impossible to determine the fair
market value for the right to use Facebook’s intellectual property outside U.S. and Canada,
states Worstall. In addition, any foreign- generated income brough back to U.S. is subject
tax liability as are the profits derived from the use of the U.S. IP abroad. Nonetheless, any
revenues arising from the use of the non-U.S. IP are only taxed in the U.S. if such are
repatriated.
a Although transfer pricing allows each entity to generate profits separately, by which the
management can evaluate the performance of each affiliated member, the method comes
with many challenges. As it was mentioned before, it can create unfairness in the
treatment of tech companies depending on the IRS/ auditors’ ability and professional
expertise to estimate the so- called “economic value”, especially when intellectual
property is involved. It can also be a very expensive process as companies need to hire
experts and/ or utilize sophisticated accounting software that can assist with setting correct
prices for goods and services. However, if the arm’s length principle is obeyed,
multinational corporations can take advantage of tax benefits in addition to avoiding
paying tariffs on the exchange; therefore, the transfer pricing method is of great benefit.
Resources:
Tax Foundation. (2023). International Tax Rules.
Worstall, T. (2016, July 29). What Facebook And Apple Can Teach You About Transfer
Pricing. Forbes.
26 USC 482: Allocation of income and deductions among taxpayers.
