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 in
order 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.
References:
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
