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.
Reference
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
