An interesting article in the New York Times recently raised the issue of a standardized transfer pricing policy as a social responsibility. In today’s global economy the issue of transfer pricing has become a central focus for many governments, including the United States. The IRS recently announced the formation of an internal team which would focus exclusively upon transfer pricing issues. The concern is multi-national corporations and even mid-sized and small business here in San Diego and around the country are paying less taxes due to discrepancies in their transfer pricing practices.
When a product, good or service is exchanged between two business entities who are affiliated or share common ownership the transaction must be accomplished at “arm’s length.” For example, when a subsidiary transfers a product to its parent company the fee charged to the parent company is the “transfer price.” Increasing the price to the parent company should in theory increase the “income” experienced by the subsidiary. It would also conceivably raise the tax basis in that product for the parent company. The question from the business perspective is simple:
How can we move profit generating transactions into the lowest possible taxation geographically?
The concern for those outside of corporate interests is that corporations are using transfer pricing policies to evade the payment of taxes. How would a standardized transfer pricing policy affect global taxation? How would it affect confidence in the markets? What impact would it have upon internal accounting practices and corporate structures?
The article presented the idea of a standardized transfer pricing policy as a social responsibility. “Corporations have become more aggressive on keeping their tax obligations to a minimum. The mobility of capital, and the keen attention paid to reported earnings catalysed by the availability of intermediaries who sometimes advocate avoidance strategies, have made tax planning a core element of financial management.” The article went on to advocate “At the same time, companies have come to embrace corporate social responsibility and frequently invest resources into social initiatives even as they pursue aggressive strategies reduce their tax obligations. In the same spirit of commitment to the society, companies should instead feel compelled to treating their tax obligations as a responsibility which should be at par with, for example, abiding by environmental regulations.”
Placing global taxation and related standard transfer pricing policy issues into the realm of a social responsibility seems idealistic. Differing countries have different motivations, financial systems, tax structures, GNPs, labor rates and raw material costs. The realities of international and domestic tax planning are resulting in an increasing number of IRS audits. Allen Barron provides a unique blend of international and domestic legal, tax, accounting and business advisory expertise under a single source vendor. If you do business across international borders, or are a local, regional or national business seeking to reduce tax burdens and increase profitability we invite you to contact us for a free consultation at 866-631-3470.