Transfer pricing allows for the establishment of prices for the goods and services exchanged
between subsidiaries, affiliates, or commonly controlled companies that are part of the same larger
enterprise. Transfer pricing can lead to tax savings for corporations, though tax authorities may
contest their claims. Companies use transfer pricing to reduce the overall tax burden of the parent
company (Seth, Anderson & Peres, 2023). Therefore, transfer pricing is a tool multinational groups
use to reduce their tax burden along with the cushion provided by IRC § 482 on how corporation
transfer pricing, which states that 'in any case of two or more organizations, trades, or businesses
owned or controlled directly or indirectly by the same interests, the Secretary may distribute,
apportion, or allocate gross income, deductions, credits, or allowances between or among such
organizations, trades, or businesses if he determines that such distribution, apportionment, or
allocation is necessary to prevent evasion of taxes. The IRS acknowledges the valuations and,
therefore, it would not be considered illegal.
Facebook conducted transfer pricing in 2010 to reduce taxable income within the United States.
The IRS opposed a transfer pricing calculation by Facebook in 2016 when the social media giant
claimed it transferred $6.5 billion of intangible assets to Ireland. With the trial expected, Facebook
would be required to pay up to $5 billion in taxes (without penalties and interest) if IRS wins the
case.
The report states that Facebook sold the intellectual property in a foreign country, which led the
IRS to investigate how it moved assets to an Irish subsidiary to avoid higher taxes. Our basic legal
and economic insistence is that tax is due where the value is created. This is the same as trying to
tax in the jurisdiction where the economic activity occurs. If the assets fall under the same
company, there should not be any taxation on transferring said assets. In some cases, the company
is double-taxed. On the other hand, some companies abuse flexibility and transfer assets within the
company to different locations in countries with lower tax brackets.
Transfer pricing is the practice in which companies and subsidiaries which are under shared or
common control can ascertain the price of goods or services at an internal level. According to
Schwartz et al. (2021), the transfer pricing practice may be exploited by business entities for the
purpose of avoiding tax since it leads to the corrosion of tax bases. Corporate tax becomes due
when economic value is created (Forbes, 2016). It is essential to identify where value is created so
that the appropriate parties can be taxed for the same. According to the U.S. Tax Code, tax is
applicable in the region where value is created. For companies such as Facebook and Apple, such a
question is complex as the value that is created by them is associated with their intellectual
property rights.
Companies may decide to engage in transfer pricing to leverage the flexible tax arrangements and
laws that exist in foreign regions. For example, Ireland is a tax haven where companies, especially
the ones that are involved in research and development activities, do not have to pay taxes. Due to
this, they can amplify their profits by saving taxes. Apple has transferred its business profits to
Ireland, which enables the company to save taxes that it would have otherwise paid to the
government of the United States of America. The practice that Apple Inc. has engaged in is fair, and
it does not violate the tax rules in Ireland. Neither does it violate the tax rules of the US since the
tax arrangement that has been made in the nation is applicable for companies that decide to bring
back their profits to the country. In case their profits remain in foreign lands, the US cannot claim
taxes.
The practice of transfer pricing can be justified since it creates an opportunity for business entities
to reduce the tax burden of the parent organization by making internal transfers to minimize the
tax base. Although transfer pricing is a fair practice that is legally allowed, it has the potential to
give rise to complexities in terms of tax computations (Martin et al., 2020). Moreover, the taxation
arrangement can be exploited and abused by unethical companies for the purpose of evading the
tax amount that they need to pay in their normal course of business. It is instrumental to have
comprehensive knowledge on transfer pricing and accordingly integrate the practice into the
business.
Reference
Martin, M, KPMG, U., and Bettge, T., 2020. Transfer pricing remains crucial as IRS CAP program
opens for 2021. International Tax Review.
Schwartz, S. C., Mashiri, E., & Sebele-Mpofu, F. (2021). An exposition of transfer pricing motives,
strategies, and their implementation in tax avoidance by MNEs in developing countries. Cogent
Business & Management, 8(1), 1944007.
What Facebook and apple can teach you about transfer pricing. (2016). 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=b9430483838b
Seth. S., Anderson. S. & Perez. Y. (2023). Transfer Pricing. Retrieved from
https://www.investopedia.com/terms/t/transfer-pricing.asp
