According to IRC Section 482, transfer pricing refers to the pricing of transactions between
controlled entities. IRC 482 invokes an "arm's length standard" and companies are required to
charge the same price to their related entities as they do to unrelated parties. Additionally, in the
absence of arm's length pricing, IRC 482 authorizes the IRS to adjust reallocate revenues and
expenses accordingly.
Although transfer pricing could relate to transactions within the United States, it is often used as a
tool for shifting tax liability to more favourable tax homes. In the Facebook issue, the question is
the value of the intellectual property? Should Facebook charge the same to its Europe based
entities as it does to the North America based companies? On the surface, transfer pricing
effectively distributes earnings throughout an organization. However, it is also effective in reducing
tax liabilities for multinational companies.
Transfer pricing enables the determination of prices for the exchange of goods and services
between subsidiaries, affiliates, or businesses under the same corporate management.
Multinational corporations can manipulate transfer prices to move earnings to low-tax jurisdictions.
Regulations impose an arm's length transaction norm that calls for pricing to be based on
comparable transactions carried out between unaffiliated parties to correct this.
Transfer prices within a controlled group must comply with an arm's length standard, according to
Section 482 of the Internal Revenue Code (the "IRC") and the following regulations. The arm's
length criteria are deemed to have been met if the outcomes of a controlled transaction mirror
those that would have been obtained if uncontrolled taxpayers had participated in the same
transaction under identical conditions.
Transfer pricing for corporations. This strategy allows a corporation to save money on taxes to
redistribute in the company, it allows businesses to make money across all their divisions and
departments. It also allows a company to assess the effectiveness of each department separately.
Transfer pricing is an accounting practice when one division of a company charges another division
for goods and service provided (Seth, 2023). It allows for the establishment of prices for the goods
and services exchanged between a parent company and its subsidiaries. Companies can save on
taxes by selling a product to a lower taxed subsidiary at a lower price. The company in a higher tax
area will see less profits and the subsidiary in a lower tax area with see a reduction in COGS (Seth,
2023). It has no overall financial impact on the corporation before taxes because one company's
sales are lower while the related company has lowered COGS. The difference comes when the
company in the higher taxed area sees a lower tax bill due to sell the items at a discount. I think
transfer pricing is a practice that can easily abused. When companies sell IPs to lower taxed
countries the U.S. does not see the benefits of income taxes from the IP. I think it can cause a
higher tax burden for individual taxpayers when companies are moving high profit IPs out of the
U.S.
References
26 U.S. Code § 482
Seth, S. (2023, May 28). Transfer pricing: What it is and how it works, with examples. Investopedia.
https://www.investopedia.com/terms/t/transfer-pricing.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=44c440bc3838
Internal Revenue Service. (20150720). Overview of IRC Section 482. Publication ISO9411_07_01.
https://www.irs.gov/pub/int_practice_units/ISO9411_07_01.pdf
Seth, S. (20230528). Transfer Pricing: What it Is and How it Works, with examples. Investopedia.
https://www.investopedia.com/terms/t/transfer-pricing.asp
Worstall, Tim. (20160729). 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=531c1e7b3838
