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.
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%. a 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. a 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. a a This range is very large
threshold I would not agree that understating by double the accurate valuation is a fair. a a
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.
