Transfer Pricing

Transfer pricing is the valuation, or pricing, of goods, services, or intangibles that are transferred between corporate entities, including a parent to a domestic or foreign subsidiary. Per IRC § 367(d)(2)(c), the value realized of such transfers is considered to be ordinary income of the transferor. This is the core of why large multinational companies engage in risky transfer pricing. Corporations will pay taxes on the transferred value to the extent it is included in income. An additional piece to this is that the US tax structure has not always been competitive, with corporate tax rates of 35% prior to the 21% introduced through the Tax Cuts and Jobs Act in 2017. Corporations do not want to pay more in taxes then necessary.

In my opinion, engaging in transfer pricing is opportunistic of multinational companies, which is why IRC § 487 sets forth provisions on re-valuing these transfers. IRC § 487 includes that gross income, between two entities, can be re-allocated or re-apportioned in order to prevent tax evasion and to ensure income is clearly stated. IRC § 487 continues to guide that a proper value of intangible property, which is the case with Facebook, is one that is realistic with alternative transfers. This is also known as an Arm's Length Transaction; when a transaction is reasonably bought and sold between two unrelated parties.

I don't necessarily disagree with transfer pricing, as long as it is done with good intent and is economically ethical to the country of the subsidiary and to the home country of the parent. In addition, I believe companies should have the transferred assets valued by at least one third party; this would attest to the legality of the transfer. In reading more about the case with Facebook, in 2010 when the transfer took place, Ernst & Young valued the intellectual property for Facebook. Facebook did not self assign a value to their assets. It will be interesting to see how this case concludes in the coming year(s).