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Assignment 4: Transfer Pricing - Research Paper Example

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Assignment 4: Transfer Pricing

The U.S. has an aggressive transfer pricing policy environment as administrators and legislators pursue to lure foreign investment. Transfer prices entail changes made between controlled (or related) entities such as branches and companies that can be either wholly or majority owned by a parent company. The paper explores diverse scenarios of transfer pricing that an entity can pursue to minimize the tax burden. Discussion Based on their earnings and transactions, it may be rewarding for U.S. corporations operating offshore to launch separate foreign entities to conduct business abroad. In the event that a U.S. corporation operates abroad as a foreign corporation and reinvests its foreign earnings offshore, then the U.S. income tax can be deferred until the income may be repatriated in the form of dividend. Similarly, a U.S. corporation (with the exclusion of a Subchapter S corporation) can claim a credit for foreign income taxes paid, which can avert the situation of income getting taxed twice (by both the U.S and the foreign jurisdiction). Another approach in which companies can alleviate the tax burden centers on seeking ways to generate wealth within countries with lower tax rates (Collins, Chamberlin, & Hirsch, 2012). For instance, a multination labeled as USAco, based in the U.S., manufactures and sells cars within the U.S. plus other two foreign countries (in this case Mexico and Ireland). The foreign sales for the company are made via CARco, which represents a wholly owned foreign corporation. Irrespective of the transfer price employed for sales by USAco to CARco, the foreign sale income amounts to $300 per car [the final sales price minus $1000 manufacturing cost minus the $200selling expense]; nevertheless, transfer prices so the impact on the allocation of the combined profit between the two entities (USAco and CARco). A transfer price of $1000 would allocate the amalgamated profit of $300 wholly to CARco, while, in the other extreme, a transfer price of $1300 would allocate the amalgamated profit of $300 entirely to USAco. In the event that the tax rate differs between that of the U.S and that of foreign countries (U.S (35%) and the applicable foreign tax rate for Mexico/Ireland (25%), the USAco group can minimize its global taxes by employing higher transfer prices for its controlled sale. In the example, is the transfer price of $1000 is employed for sale by USAco to CARco the $300 gross profit is mainly allocated wholly to CARco, and the total tax on that profit translates to foreign tax of $135 [$300 income multiplied by 25% foreign tax rate]. A multinational company (MNC) might utilize transfer pricing strategies for two core purposes: income tax liability reduction or funds repositioning. In the event that the tax rate within the country of the selling affiliate is lower than the tax rate within the buying affiliate country, a high, markup policy on sales is likely to leave minimal taxable income within the buying affiliate country to be taxed at an increased rate (Urquidi, 2008). Even if, the tax rate within the purchasing affiliate is not higher than that of the selling affiliate country, a higher markup policy will leave reduced funds to be removed from the purchasing affiliate country. In the event that a transfer price is enhanced, the selling firm’s revenue and profits rise, and the receiving firm’s profits dip. Selling brand new cars for $1000 to a related firm within a tax haven, which ...Show more


Transfer Pricing Author Insttitution Transfer Pricing Introduction Transfer pricing represents an intricate yet interesting challenge to MNCs, who ought to establish suitable prices at which goods, services, intellectual property, and financial instruments are transferred among the affiliated entities…
Author : erich15
Assignment 4: Transfer Pricing essay example
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