Continuing My Studies and Specializing in Transfer Pricing

Day J. and Krakhmal V. (2006) fourth edition (2011), An introduction to accounting and finance in business, Milton Keynes, The Open University

11 General Transfer Pricing Rule Transfer price ACTG 2020 = Additional outlay cost per unit incurred because goods are transferred Week 11 +

The "transfer pricing" provision attempts to identify the taxable income had the transaction been between unrelated parties dealing at arm's length.

However, the companies only have to pay the U.S. tax for foreign revenues once they bring the profits back to the United States. As a result of these current tax laws, U.S. companies that seek to avoid high corporate tax rates hold their foreign earned profits overseas. “It just makes no sense to pay a substantial tax on it,” said Joseph Kennedy, a senior fellow at the Information Technology and Innovation Foundation (Rubin, R.). It is far too easy for an IT corporation to create a patent in a foreign country and direct revenue to a corporation within that country, thus avoiding the much higher U.S. tax rates. According to Joint Committee on Taxation estimates, the lost revenue is increasing over time as corporations find even more creative ways to make their U.S. profits look like offshore income (Richards, K., & Craig, J.). As result, multinational American corporations have as much as $2 trillion held in overseas subsidiaries and if brought into the United States with the current tax laws, the federal government could benefit by nearly $50 billion per year.

Summa Holdings, Inc. v. Commissioner, Docket 16-1712 (6th Cir. Feb.16, 2017) is an interesting read, especially for export businesses. The transaction does not violate the Internal Revenue Code and provides substantial tax savings. The Court takes exception to the IRS’ use of the substance-over-form doctrine to “undo a transaction just because taxpayers undertook it to reduce their tax-bills.”

The main objective of many companies is to minimize their tax obligations. Jeffers (2014) discussed the reason of why companies adopt tax inversion strategies. The researcher indicated that the income maximization is a major reason of companies attempting to reduce their tax liability (pp. 100-101). Tax inversion strategies provide companies an advantage to lower income tax rate. Today, U.S. corporations renounce its U.S. citizenship and move to low-tax countries. Companies that reincorporate oversees are not obligated to pay U.S. taxes on earning income (p. 99). Many countries implement tax competition strategies to attract and retain businesses. Well-known companies, such as Exxon Mobil, Hewlett Packard, Tyco, General Electric, PepsiCo, etc. take benefits of tax shelter opportunities overseas (p. 102). Other benefits of the jurisdiction abroad are flexible banking laws and simplified litigation processes.

The last major overhaul of the U.S tax code took place over twenty-eight years ago as part of the Tax Reform Act of 1986. President Ronald Regan’s Treasury Department proposed a tax-neutral reform with the definitive duty of simplifying the overall code. However, the absence of any reform since then greatly reflects the United States current condition, in that “The United States provides a good example of an uncompetitive tax code” (Pomerleau & Lundeen, 2014). The following will examine the main components of the tax code that make a nations taxing system competitive. It will then identify two parts of the code, that when combined create a disadvantageous environment for any American business who competes internationally.

The last major reform of U.S. tax law took place in 1986. The complaints involved an individual tax rate of 39.6% and a corporate tax rate of 35%, which led to distortions due to loopholes, exploitation, and the increasing difficulty of national authorities in taxation. The complexity of transnational corporations in the global context account of the disorganization and transfer pricing of enterprises.

that if companies want to take their operations overseas, then tax the companies extra for

➢ Taxation – firms functioning when dealing with a different country the subject to that country’s laws and regulations.

As this is an international transfer, there are even more considerations that become relevant. For example, the corporate tax rate applied in North American versus Europe should be considered. Furthermore, management should look

If it is included, then profit will be decreased. The Fifth and Eighth Circuits have taken an approach that foreign taxes are not economic costs and should not be deducted from pretax profit. However, in the Second Circuit, the court in BNY concluded that the objective prong of the economic substance test requires the inclusion of foreign taxes in both a calculation of pre-tax profit and a consideration of the transaction’s overall economic effect. The court supports its decision with the congressional intent that foreign tax credits are to “facilitate global commerce by making the IRS indifferent as to whether a business transaction occurs in this country or in another, not to facilitate international tax arbitrage.” Taking into consideration the tax spread, the Bx payment, and the U.K. taxes paid by the trust, the transaction does not generate profit and thus fails the objective prong of the

Metlife, Inc. (“Metlife”, ”Company”) is a multinational insurance company which carries operations both in the U.S. and in various other foreign jurisdictions. The taxable income that Metlife generates abroad through its subsidiaries is subject to income tax under the laws of those foreign jurisdictions within which the income is derived from. Under the U.S. worldwide taxation system, that same income is also subject to U.S. tax upon (deemed) repatriation to Metlife. The apparent result of the above is the double taxation of the income earned abroad. In order to alleviate this issue, the U.S. makes available to the taxpayer a Foreign Tax Credit (“FTC”) for foreign income taxes paid, subject to certain limitations. The calculation of the FTC is a complex process which is comprised of many steps, most of which are beyond the scope of this memorandum. The only step that this memorandum is concerned with is the allocation/apportionment of expenses to

The Learning Outcomes in this course also help you to achieve some of the overall

Intercompany transactions could occur across national borders, it would lead MNC companies to get more exposure to the differences of the tax regulations between countries. This might lead MNC companies to set up their objective to minimize their taxes through the use of discretionary transfer prices. These issues are attracted the attention of the member of the U.S. senate, foreign governments and international organization such as the OECD, G20 and European Union (EU).