Transfer Pricing and Valuation of Assets
Please prepare a response to the following post:
Transfer pricing occurs when goods and services are exchanged between affiliate or subsidiary domestic and multinational firms and is built into the tax code. IRC 482 lays the ground rules so that corporations don’t abuse the system. As tax professionals, it is not our job to agree or disagree. It is our responsibility, when presented with the situation, to advise our client of the accurate value of the assets to prevent a material misstatement.
Section 4.61.3.4.9 relates directly to intangible property specifically and Reg. 1.482-4 describes the methods used to determine what constitutes “an arm’s length charge for a controlled transfer of intangible property”. Further, Section 367(d) speaks to the requirement to include in gross income the amount that represents that arm’s length charge.
It seems to me that the real issue is valuation. Corporations prefer a higher valuation resulting in lower potential tax liability. The IRS prefers a higher (or at least more accurate) valuation resulting in a greater tax liability. The job of the IRS examination team is to determine whether the corporation’s valuation is understated.
Part of the examination process is to compute financial ratios, make industry comparisons, and decide if the corporation participates in cross-border income shifting. I know that companies work very hard at minimizing their tax liability – don’t we all? But eventually, the government looks at historical reporting and compares that to published corporate valuations and realizes that something’s amiss.
Response Post to Transfer Pricing
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Response Post to Transfer Pricing
My colleague is clear that transfer pricing entails intercompany transactions that involve the transfer of goods, intangibles, or services. In particular, the regulations of how transfer pricing should occur are given under the Internal Revenue Service (IRS) section 482. Another significant point that my peer makes is that the primary responsibility of tax professionals is to guide their clients accordingly by ensuring accuracy in stating the value of transferable assets. In addition, I would like to add that a tax professional should elaborate on the consequences of understating the value of assets to prevent their clients from facing adverse legal repercussions.
In most cases, companies use transfer pricing to optimize their taxes after profits. Transfer pricing is used as a tax avoidance strategy. Notably, tax avoidance happens when there are differences in viewing taxes for taxpayers and the government (Irawan, Kinanti, & Suhendra, 2020). Since the government perceives remitting taxes by individuals and corporations as mandatory, firms understate the value of their asse...