1. A few key points about Transfer Pricing ACCT7310 May 1, 2013

2. Effects on Income Except for tax impacts, no impact on overall consolidated income Except for tax impacts, no impact on overall consolidated income Affects distribution of income among segments Affects distribution of income among segments 2

3. The Importance of Transfer Pricing Evaluation of a division for sale (What earnings are relevant?) Minority interest in a subsidiary (Is subsidiary being "plundered"?) Tax minimization (Can shift income to some degree.) Governmental contracting (Endorses full-cost TPs.) 3

4. What Can Happen Regarding Goal Congruence? From corporations viewpoint, its an outsourcing decision! Internal production is better for the company overall Outsourcing is better for company overall Deal is completed internally Good outcome Bad outcome Purchaser goes outside Bad outcome Good outcome 4

5. Will the Desired Outcome Occur? If outsourcing is desirable, there will be a range of acceptable prices: Ceiling: The outside market price that buyer would pay [Room to share benefit.] Floor: The outlay costs of supplier + opportunity cost. If idle capacity, there is no opportunity cost. If no idle capacity, then its sales price to current outside customer. 5

6. Tax & Multinational Transfer Pricing 6

7. Tax Implications Eli Lily Case (1957) IRS objected to tax return Lily had used variable costs as TP basis Court decided the true purpose was tax avoidance, held for IRS Established market-based TPs for tax purposes 7

8. Tax & Multinational Transfer Pricing Transfer prices often have tax implications. Transfer prices often have tax implications. Tax factors include not only income taxes, but also payroll taxes, customs duties, tariffs, sales taxes, and other levies on organizations. Tax factors include not only income taxes, but also payroll taxes, customs duties, tariffs, sales taxes, and other levies on organizations. Section 482 of the U.S. Internal Revenue Service Code governs taxation of multinational transfer pricing. Section 482 of the U.S. Internal Revenue Service Code governs taxation of multinational transfer pricing. 8

9. Multinational Transfer Pricing Section 482 requires that transfer prices for both tangible and intangible property between a company and its foreign division be set to equal the price that would be charged by an unrelated third party in a comparable transaction. Section 482 requires that transfer prices for both tangible and intangible property between a company and its foreign division be set to equal the price that would be charged by an unrelated third party in a comparable transaction. 9

10. Multinational Transfer Pricing Transfer prices can reduce income tax payments by recognizing more income in low tax rate countries and less income in high tax rate countries. Transfer prices can reduce income tax payments by recognizing more income in low tax rate countries and less income in high tax rate countries. Tax regulations of different countries restrict the transfer prices that companies can choose. Tax regulations of different countries restrict the transfer prices that companies can choose. 10

11. The End 11