Transfer pricing allows large companies/organizations to transfer profits out of one company and
into a tax haven country. The IRS is allowed to contest the claims of these organizations. IRC 482
allows the IRS to adjust income, credits, and deductions. Transfer pricing is used by companies to
value their assets as low as possible to avoid high taxes but IRC 482 states that the prices charged
by one affiliate to another affiliate for the exchange of goods should be the same if charged to a
non-affiliate.
In Facebooks case, the company moved their assets to a subsidiary in Ireland to avoid paying higher
taxes in the U.S. I do not agree with this as a company or individual should have to pay taxes on
assets where they are gained. If all or some of the assets were gained in the U.S., those should be
taxed in the U.S. In Apples case, I agree that the company should pay taxes where its economic
activity takes place, which in their case is in Ireland. The company is not simply moving assets to
avoid higher taxes but it does have economic activity occurring in Ireland.
Transfer pricing can benefit corporations in both an internal and external setting. It takes place
when the same company transfers goods or services between divisions. The parent company can
also charge lower prices to their subsidiaries for parts or products than they would sell the items
for on the market. For example, imagine that our parent company sells car parts and the two
subsidiaries operate as small mechanics. The parent company sells one part that is often needed in
repairs for $100 on the open market, but only charges their subsidiaries $75. Over the course of a
month, the parent company sells 10 of these parts to the market, and 10 to the subsidiary. If the
products were all charged at the same price, the parent company would have revenue of $2,000 for
the month, however, they only have $1,750, indicating a lower amount of income, and therefore, a
lower taxable base and tax owed. At the same time, if the subsidiary paid $100 for each of the 10
products purchased, their COGS would be $1,000, but since they had a lower cost for the product,
COGS are $750. While it seems that the transfer pricing method offers the ability to transfer taxable
income and expenses between a parent and its subsidiaries to create a wash, these transfers do not
show on financial reports presented to investors, offering them with a skewed representation on
how the company they are supporting is performing.
Transfer pricing within multinational corporations allows for the allocating earnings made by a
parent company to their subsidiaries in order to reduce the taxable income of the parent
organization (Seth, 2023). For example, if a corporation has taxable income of $1 million with no tax
estimates made throughout the year, they would have a tax rate of 21% and taxes due of $210,000.
Now, imagine a second company with the same taxable income, but two subsidiaries. The second
company uses transfer pricing to move $200,000 of their taxable income to each of the two
subsidiaries. Now, the company has taxable income of $600,000 and owes taxes of $126,000. Each
subsidiary owes taxes of $42,000. The total taxes owed between the parent and the subsidiaries
add up to the same $210,000, however, now the parent organization is only responsible for $84,000
less than they were originally.
In both cases, transfer pricing between subsidiaries creates a wash between taxes. The only
problem I can see is that the parent and subsidiaries of public companies would have to make sure
this was accurately presented in their financial reports.
Transfer pricing as stated in Section 482 of the code gives the IRS authorization to adjust income,
credits, deductions, or allowances of commonly controlled taxpayers. This allows the IRS to prevent
evasion of taxes, as well as, it will allow them to clearly reflect their income. When it comes to
transfer pricing large corporations push towards valuing their assets as low as possible in order to
avoid higher taxes. Section 482 ensures that all persons pay the same amount in taxes if they are
under the same circumstances as one another.
In the case of Facebook, it chose to move assets to an Irish subsidiary to avoid higher taxes. This
allows for Facebook to avoid higher tax liabilities as a company. I do not agree with Facebook doing
this because your assets should be taxed wherever they are gained, and in this case if they were
gained in the United States, they must be taxed in the United States in regards to the whole
amount of their value. When it comes to the situation for Apple, I agree that whatever state you
are doing business in is the one where you should be taxed. Therefore, if all of Apple's economic
activity takes place in Ireland then it should indeed be taxed in Ireland rather than the United
States.
Reference:
Transfer Pricing | Internal Revenue Service. (n.d.). Www.irs.gov.
https://www.irs.gov/businesses/international-businesses/transfer-pricing
Management Study Guide. (n.d.) How are Losses Treated in Corporate Tax?
https://www.managementstudyguide.com/how-are-losses-treated-in-corporate-tax.htm
Seth, S. (2023, May 28). Investopedia. Transfer Pricing: What it is and How it Works, With Examples.
https://www.investopedia.com/terms/t/transfer-pricing.asp
Cornell Law. (n.d.). 26 U.S. Code § 482 - Allocation of income and deductions among taxpayers
[Review of 26 U.S. Code § 482 - Allocation of income and deductions among taxpayers]. Cornell
Law. Retrieved July 5, 2023, from https://www.law.cornell.edu/uscode/text/26/482
Worstall, T. (2016). What Facebook and Apple Can Teach You About Transfer Pricing. Forbes.
Retrieved July 6, 2023, from https://www.forbes.com/sites/timworstall/2016/07/29/facebooks-fun-
with-transfer-pricing-and-joe-stiglitz-doesnt-understand-apples-tax-at-all/?sh=563b3d7e3838
