ACCT618 Unit 5 Individual Project

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Feb 20, 2024

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GLOBALIZATION Globalization Domonique Jones Professor: Treisha Thorpe ACCT618-2304B-01 Taxation and Business Decisions 10/31/2023
GLOBALIZATION Globalization What does transfer pricing entail? Why is it a matter of significance for the Internal Revenue Service (IRS)? The term "transfer price", or also referred to as the "transfer cost", pertains to the exchange of goods or services between related parties. This is particularly evident in transactions conducted among different departments within an organization (Tuovila, 2022). Multinational companies commonly utilize transfer pricing tactics as a way of avoiding taxes and maximizing their profits by redirecting income from high-tax areas into more favorable ones. As such, it is essential for entities like the IRS to monitor these activities closely since they significantly impact how funds are allocated domestically versus internationally (Seth, 2022). By manipulating transfer prices based on varying tax rates across countries, businesses can reduce overall taxable earnings through charging higher costs amongst divisions situated in higher taxed regions while implementing lower prices towards those located elsewhere with more lenient policies – consequently leading to increased net revenue generation (Seth, 2022). The Internal Revenue Code's Section 482 gives the IRS the power to modify the earnings, write-offs, incentives, or nominations of related taxpayers to deter tax avoidance and achieve true representation of their income. Typically speaking, regulations established under this section imply that fees assessed between affiliated entities on transactions involving product transferals as well as intangibles "comport with" those charges warranting agreement if independent parties had performed such dealings amidst similar conditions (Internal Revenue Service, n.d.).
GLOBALIZATION To avoid excessive taxes through transfer pricing, the IRS has enforced numerous laws and regulations. One measure that guides companies is the "arm's length principle," which advises them to establish prices comparable to those charged by an unrelated entity in a similar transaction. In contrast, the "best method rule" obligates businesses to determine transfer prices using reliable methods exclusively. Additionally, as it could significantly impact tax surcharges of corporations venturing into global markets, deciding on appropriate transfer strategies for them becomes crucial. To prevent legal punishments or financial penalties imposed by the IRS authorities settling arguments strategically should be prioritized by these entities when dealing with inter-company transactions involving different countries' currencies/market rates/tax systems/and so forth. Why does a company use transfer pricing? Transfer pricing is an approach adopted by organizations to decrease the overall tax expenses of their parent company. In addition, multinational firms use transfer pricing for internal product or service exchange among subsidiaries and divisions to align interests towards achieving common goals. Various purposes can be served through transfer pricing like allowing multinationals to tap into international tax planning opportunities while maximizing profits via shifting them where taxation costs are lower. Multinational businesses benefit from millions worth of savings on taxes by setting prices at levels that reduce their total burden across inter- corporate transactions. Note: The rewritten version aims for better readability without comprinput.ng on accuracy compared with the original text provided as input. Despite its benefits, transfer pricing has several drawbacks. One of the most significant is that it can be abused and exploited for tax evasion purposes. Multinational corporations (MNCs) may artificially price their intra-company transactions at low levels to avoid paying taxes in
GLOBALIZATION countries with high taxes, thereby transferring profits from these nations to low-tax ones. Such practices not only damage MNCs' reputations but also fuel hostilities between nations while complicating accurate transfer-pricing calculations, resulting in disagreements and even penalties. In what ways can an employee be impacted by transfer pricing? Can the decision to expand internationally be influenced by transfer pricing considerations? Employee remuneration may be impacted by changes in transfer pricing. If decisions on tax obligations and transfer pricing are postponed until the last moment that is possible, managers who base a part of their compensation on profitability of division may feel discouraged following the new 12-month calculation (Eagan, 2021). Transfer pricing can affect employees in multiple ways: if it results in decreased earnings for a subsidiary or specific division, this could lead to wage cuts or job losses; conversely, if an effective method is implemented that improves profits through transfer prices strategy, there might be incentives offered to employees such as salary hikes. The decision to expand internationally can be impacted by transfer pricing. Before venturing into a new market, an organization needs to assess the possible tax advantages and disadvantages associated with its transfer pricing approaches. If the destination country boasts lower taxes than its home base, this would make for an enticing prospect; however, should that same nation has stringent laws related to transfer pricing or if there is reluctance towards possible taxation difficulties, said business could choose to either abstain from pursuing opportunities in the region entirely or adjust their conservative approach accordingly. To sum up: Transfer Pricing has both positive and negative impacts on human resources and therefore companies are compelled to consider this crucial aspect while determining whether they want
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