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.
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.
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.
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.
Tax experience includes preparing individual tax returns at HR Block and working as a
Revenue Agent for the State of WV.
Transfer pricing is a price charged by a company for goods, services, and intangible property
to a subsidiary or other related company. This practice can be abused when income and
expenses are improperly allocated for the purpose of reducing taxable income. When a tax
authority determines that a transfer price in a controlled transaction between associated
enterprises is incorrect or where an allocation of profits fails to conform to the arm’s length
principle a transfer price adjustment is mandated, under Section 482. However, full tax
benefits can be recognized for transactions covered by an Advanced Pricing Agreement
(APA).
The Arm’s Length Principle (ALP) is mandated by the Organization for Economic Co-
Operation and Development (OECD). The guidelines for transfer pricing propose the
company’s headquarters and affiliates of a multi-national enterprise (MNE) should be treated
as separate entities and that the controlled internal transfer price should mimic the market
price obtained in comparable transactions at arm’s length.
Using transfer pricing to save on tax payments may reduce the costs of products consumers
buy. A progressive tax increases along with the taxpayer’s income. Profit shifting occurs
when profits are reduced in certain jurisdictions where profits are allocated to the lower-taxed
jurisdiction. These savings can be passed down to the consumer if the perceived marginal cost
is lowered under the cost-plus economic policy.
The author of the article provided has also a very interesting style of writing, that engages the
reader. The topic in question is transfer pricing, which is an “accounting practice that
represents the price that one division in a company charges another division for goods and
services provided.” (Shobhit, 2023). It is a legal method widely used by most multinational
companies such as Meta and Apple (as the article describes), the goal is to allocate income to
jurisdictions with lower tax rates and expenses to jurisdictions with higher tax rates, thereby
minimizing the overall tax liability. For what I found, the structures that lead companies to
engage in transfer pricing are resulting from the difference in tax rates and regulations of
different jurisdiction. This allows for companies to use, for example, intellectual property and
intangible assets to make up most of their market value, this includes brand name and
proprietary technology (Shobhit, 2023). These assets can be difficult to value accurately, and
they can be legally owned by a subsidiary in a low-tax jurisdiction. The subsidiary then
charges other parts of the company for the use of this IP, effectively shifting profits to the low-
tax jurisdiction. Another tax structure that relates to this topic is the intra-company
transactions. Multinational companies frequently have complicated structures with numerous
subsidiaries. These subsidiaries frequently conduct business with one another, such as selling
goods or services. Prices charged in intra-company transactions can be modified to move
profits to low-tax jurisdictions. These are the costs referred to as "transfer pricing." (Tuovila,
2022)
Now, I agree with the practice of transfer pricing, if it stated within the legal framework. I
understand it is a complicated topic, however, the reason there are laws that allow for
companies to engage in this legal practice is to encourage commerce. Private companies, will
use their resources to interpret the law to their favour as they have an obligation to their
shareholders to maximize profits, and reducing tax liability is a part of that. On the other
hand, I understand that it can lead to significant loss of tax revenue for countries, particularly
those where the economic activity is taking place. In turn this can result in a whole different
can of worms.
Transfer pricing is both an opportunity and a risk for multinational companies. IRC Section
482 allows organizations, trades, or businesses owned or controlled directly or indirectly by
the same interests to distribute, apportion, or allocate gross income, deductions, credits, or
allowances between or among such organizations, trades, or businesses if necessary to
prevent evasion of taxes or reflect the income. If done domestically this creates a wash but
done internationally it presents an opportunity for multinational companies to shift income to
countries with lower tax rates.
While this shift is legally allowed, some corporations can be tempted to take advantage and
misuse this opportunity provided by the tax regulation. This is a huge risk as transfer pricing
is scrutinized by tax authorities and carries heavy penalties for inappropriate use or errors.
Sec. 482 additional includes that in the case of any transfer of intangible property the income
must be appropriate for the income attributable to the intangible and requires a valuation. This
provides a challenge for some corporations. Treas. Reg. Sec. 1.482-1 and 1.6662-6 does
provide some guidance and interpretation of the strict requirements as well as penalties
involved. b
I do not have an opinion as far as whether I agree or disagree with transfer pricing, I can see
the pros and cons on both sides. For example, one pro is that companies that engage in
transfer pricing strategies can help reduce tax liabilities allowing for more profits to be
reinvested back into the company for R&D and such. On the other hand, it can create a
competitive disadvantage for many domestic companies competing with those multinational
companies because their higher tax burden means less retained profits to be reinvested.
From prior knowledge each subsidiary or entity within a parent company are their own
corporation. This enables each subsidiary to be required to file taxes on their own § 11 and
taxes imposed is 21%. Although the corporate tax rate imposed has been lowered in the last
several years, there are still countries with even lower rate rates.
So, when a U.S. corporation decides to move a portion of their business by creating a foreign
subsidiary, they can achieve a lower tax liability. The amount that gets transferred according
to § 482 states, “Require the valuation of transfers of intangible property (including intangible
property transferred with other property or services) on an aggregate basis or the valuation of
such a transfer on the basis of the realistic alternatives to such a transfer”.
I can see how this can be very risky especially with intangible assets that are unique where
there is not much to compare against to ensure a realistic valuation is getting created.
However, there is a threshold for valuations in regards to § 482, specifically § 6662 states that
the value of property misstated that falls outside of 50%-200% then there would be a penalty.
b This range is very large threshold I would not agree that understating by double the accurate
valuation is a fair. b b
Section 482 of the Internal Revenue Code (IRC) pertains to the transfer pricing regulation.
This provision becomes applicable when multiple entities, regardless of their organizational
form or location, are owned or controlled by the same interests, either directly or indirectly.
According to regulatory guidance, it is stipulated that section 482 applies to all transactions
involving related parties and commonly controlled parties, irrespective of the taxpayer's
intention. The United States Congress implemented section 482 to prevent tax avoidance. Its
purpose is to ensure that related parties accurately represent income and to establish equitable
tax treatment between controlled and uncontrolled taxpayers. Section 482 of the Internal
Revenue Code (IRC) sets forth a broad criterion that applies to transactions involving parties
with a relationship, along with an additional measure that must be met specifically for
transfers of intangible assets.
Section 482 of the Internal Revenue Code grants the Internal Revenue Service (IRS) the
authority to redistribute income, deductions, credits, or allowances within a controlled group
of entities to reflect income or prevent tax evasion accurately. While the arm's length
principle is not expressly mentioned, the statutory language incorporates it by permitting
adjustments to the taxable income of a controlled taxpayer to account for the income that
would have been generated had the transaction occurred between unrelated parties.
Section 482 also offers a supplementary assessment for transferring intangible property (IP).
The income derived from the transfer or licensing of intellectual property (IP) must be
proportionate to the income attributed to the IP. According to the commensurate-with-income
standard, it is necessary to consider the actual profits obtained from utilizing an intangible
asset when determining a fair and reasonable price for transferring it. Consequently, it is
imperative that the compensation amount accurately represents the fluctuations in income
associated with the intangible asset throughout its lifespan.
The regulations about transfer pricing are encompassed within the rules established by the
United States Treasury Department and overseen by the Internal Revenue Service (IRS) under
section 482 of the Internal Revenue Code (IRC). These are specifically defined as
Regulations 1.482-1 to 1.482-9 in the Treasury Regulations. The Treasury Regulations play a
central role in the transfer pricing framework in the United States, serving as the primary
authority for interpreting the arm's length standard and the commensurate-with-income
standard. Tax authorities mandate that taxpayers choose the most suitable pricing method to
assess the arm's length nature of transfer prices, considering all relevant facts and
circumstances.
Some reasons that lead companies to engage in transfer pricing are as follows:
Companies may employ transfer pricing strategies to benefit from variations in tax rates
across different countries or jurisdictions. Companies can reduce their overall tax burden by
strategically relocating profits to jurisdictions with lower tax rates.
Several nations provide tax incentives or advantages to corporations participating activities or
operations. To access these advantages, corporations use price manipulation tactics to
generate the perception of heightened economic activity within those regions.
The practice of transfer pricing can be employed to relocate profits associated with
intellectual property rights to jurisdictions with lower tax rates. Companies can decrease their
tax liability by transferring ownership of patents, trademarks, and copyrights to their
subsidiaries in their respective jurisdictions.
Companies often enter into cost-sharing agreements for research and development (R&D)
expenses. They can allocate these expenses across different jurisdictions through transfer
pricing, potentially reducing their tax liability in higher-tax jurisdictions.
The concept of transfer pricing is undoubtedly a complex subject within the realm of taxation.
From an ethical standpoint, it is imperative to acknowledge the legal obligation to fulfil tax
obligations while simultaneously recognizing the fiduciary responsibility towards
shareholders to optimize financial gains. Transfer pricing strategies are deemed acceptable if
companies adhere to regulatory requirements. I agree with the practice even more, when the
resulting tax savings are allocated towards augmenting employee wages rather than solely
benefiting shareholders.
26 U.S. Code § 482 - Allocation of income and deductions among taxpayers. (n.d.). LII /
Legal Information Institute. https://www.law.cornell.edu/uscode/text/26/482
McGee, R. W. (2010). Ethical issues in transfer pricing. Manchester Journal of International
Economic Law, 7(2), 24-41.
Transfer pricing in the United States: overview. (2018, September 1). Practical Law.
https://uk.practicallaw.thomsonreuters.com/w-006-
9130?contextData=(sc.Default)&transitionType=Default&firstPage=true
Worstall, T. (2016, July 29). What Facebook and Apple Can Teach You About Transfer
Pricing. Forbes. https://www.forbes.com/sites/timworstall/2016/07/29/facebooks-fun-with-
transfer-pricing-and-joe-stiglitz-doesnt-understand-apples-tax-at-all/?sh=21be25d03838
References
§ 11: Tax imposed
§ 482: Allocation of income and deductions among taxpayers
§ 6662: Imposition of accuracy-related penalty on underpayments
26 U.S. Code § 482 - Allocation of income and deductions among taxpayers
26 CFR § 1.482-1 - Allocation of income and deductions among taxpayers.
26 CFR § 1.6662-6 - Transactions between persons described in section 482 and net section
482 transfer price adjustments.
Shobit, S. (2023). Transfer pricing: What it is and how it works, with examples. Investopedia.
https://www.investopedia.com/terms/t/transfer-pricing.asp
TUOVILA, A. (2022). Transfer price: What it is, how it's used, and examples. Investopedia.
https://www.investopedia.com/terms/t/transferprice.asp
Worstall, T. (2016, July 29). What Facebook and Apple can teach you about transfer pricing.
Forbes. https://www.forbes.com/sites/timworstall/2016/07/29/facebooks-fun-with-transfer-
pricing-and-joe-stiglitz-doesnt-understand-apples-tax-at-all/?sh=4bc817763838
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.
