Question

Based on prior knowledge and research of the U.S. Tax Code, describe the tax structures that lead companies to engage in transfer pricing. Explain whether you agree or disagree with the practice of transfer pricing and why.

Answer 1

Transfer price is the price at which divisions of a company transact with each other, such as the trade of supplies or labor between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities. A transfer price can also be known as a transfer cost.Transfer pricing can also refer to regulations that governments and tax authorities use for regulating intercompany transfers. Intercompany transfers done internationally have tax advantages, which has led regulatory authorities to frown upon using transfer pricing for tax avoidance.

Since very beginning USA had very high & very strict tax structure.Since 1934, the arm’s-length standard has been used to determine whether crossborder, inter-company transfer pricing produces a clear reflection of income for US Federal income tax purposes. The arm’s-length standard has become the internationally accepted norm for evaluating inter-company pricing.In 1986, the US Congress ordered a comprehensive study of inter-company pricing and directed the Internal Revenue Service (IRS) to consider whether the regulations should be modified. This focus on transfer pricing reflected a widespread belief that multinational enterprises operating in the US were often setting their transfer prices in an arbitrary manner resulting in misstated taxable income in the US. Additional concerns were raised regarding the difficulty of the IRS to conduct retrospective audits to determine whether the arm’s-length standard had been applied in practice due to the lack of documentation supporting the inter-company pricing schemes.No adjustment will be made to a taxpayer’s transfer pricing results if those results are within an arm’s-length range derived from two or more comparable uncontrolled transactions. This concept of a range of acceptable outcomes rather than a single arm’slength answer is the key to understanding the flexible application of the arm’s-length standard that underlies the US regulations. Under the regulations, the arm’s-length range will be based on all of the comparables only if each comparable meets a fairly high standard of comparability. If inexact comparables are used, the range ordinarily will be based only on those comparables that are between the 25th and 75th percentile of results. However, other statistical methods may be used to improve the reliability of the range analysis. If a taxpayer’s transfer pricing results are outside the arm’s-length range, the IRS may adjust those results to any point within the range. Such an adjustment will ordinarily be to the median of all the results. The regulations permit comparisons of controlled and uncontrolled transactions based upon average results over an appropriate multiple-year period. If taxpayer’s results are not within the arm’s-length range calculated using multiple-year data the adjustmentNo adjustment will be made to a taxpayer’s transfer pricing results if those results are within an arm’s-length range derived from two or more comparable uncontrolled transactions. This concept of a range of acceptable outcomes rather than a single arm’slength answer is the key to understanding the flexible application of the arm’s-length standard that underlies the US regulations. Under the regulations, the arm’s-length range will be based on all of the comparables only if each comparable meets a fairly high standard of comparability. If inexact comparables are used, the range ordinarily will be based only on those comparables that are between the 25th and 75th percentile of results. However, other statistical methods may be used to improve the reliability of the range analysis. If a taxpayer’s transfer pricing results are outside the arm’s-length range, the IRS may adjust those results to any point within the range. Such an adjustment will ordinarily be to the median of all the results. The regulations permit comparisons of controlled and uncontrolled transactions based upon average results over an appropriate multiple-year period.

As per my opinion Transfer pricing Taxation should be there as it would only benefit very large organisations and also tax authorities would not be able to collect appropriate amount of tax so taxation on transfer pricing agreement should be there but the compliance of transfer pricing should be made simpler.