Transfer Pricing

Running Head: Multinational Firms Name University Course Tutor DateIntroduction The United States federal government imposes income tax on individuals and corporate that generate income within the United States and outside the United States. This follows from the nature of the taxation system that has been adapted in the United States that stretches to reach the United States citizens generating income outside the United States. The federal government, through the Internal Revenue Service (IRS), it applies a progressive tax on the taxable income. The taxable entities include individual persons residing in the United States both citizens and non citizens, and the American citizens who are generating income outside the country. The other entities that are liable to pay income tax include the partnerships, both limited and unlimited companies, corporations, trusts and estates. Income tax policies in the US can be traced back to 1890's under the United States Constitution, that is, Article one, section 1., as given in clause one. This was during the time of the civil war. At the current times, the income tax provisions are contained in the United States constitution and also provisions that are given in the Internal Revenue Service Code. The Internal Revenue Service is the agency that is responsible for the US tax income collection and also the enforcing of the taxation rules. The main aim of the rules is to define the scope of taxation and the also ensure that there are minimum tax evasion cases reported in the United States. Tax Considerations of Doing Business in Puerto Rico In Puerto Rico, a company is regarded domestic firm in the case that it is governed by laws in Puerto Rico and when governed by laws from anther country it is viewed as foreign company. In this case, taxation is carried out based on its global income. In addition, a company uses the calendar or financial year in computing its tax. A company is taxed a constant rate of 22%. Surtax is imposed on payable revenue, once a deduction of USD 25,000 is done. In Puerto Rico, there are no stipulations for filing consolidated income. Controlled or affiliated companies are restricted to a single surtax exemption that should be allocated between group members. A branch in this country is taxed equivalent rate as a company and as such it is allowed to pay same deductions as well as credits. On the other hand, branches of foreign firms are obligated to pay income tax on their Puerto Rican revenue and on revenue effectively related on trade or its operations within the country. Additionally, foreign companies are obligated to branch profit tax or BPT. Usually, BPT is 25% (but manufacturing, hospitality services and shipping firms pay 10%) and it is affected on income considered to be send from a branch in Puerto Rico. In general, the dividend is generated only if the branch’s profits are not reinvested in this country. However, BPT is not imposed on those companies whose gross return from sources in Puerto Rican is no less than 80%. To promote industrialization, certain business operations (service industries, manufacturing) are entitled to partial exception from both income and property taxes while 60% exemption from metropolitan license taxes. These exemptions run for a period of 10 to 25 years based on the setting of the company. With respect to partial income, this country is categorized into four different industrial zones. Owing to this fact, the main harbors within Puerto Rico have been categorized into foreign and foreign business zones while domestic products can be exported to USA without necessarily following the formal procedure of custom inspection and payment of excise taxes. Tax Considerations of Doing Business in Hungary In Hungary, a company is regarded as a resident in the event that it is integrated in and head quartered in Hungary. Foreign companies cannot operate via branches; however they can set up representative offices. Taxation of resident companies depends on their global incomes. All business entities in Hungary are required to pay business profits of about 40%. This is applied through tax incentives that aim at promoting foreign venture in manufacturing firms. Companies that are to these kinds of profits are exempted from other forms of income taxes. Companies with foreign ownership are entitled to 4.5% tax on all types of business profit. Additionally, foreign companies in Hungary are required to pay a 40% corporate tax on their taxable income. The taxable income of a representative office is considered 90% when 6% of sales are done by its parent firm and 90% of 5% sales are done externally in case the representative office is involved. Increase of Market Share The firms opt to take up on international market so that they can increase their market share. Increase of the market share however little, is of paramount importance and it can not be ignored. This is why many U.S based multinational firms thrive on and therefore one of the motivations for international investment. As we have learned, domestic market at times is not enough and hence the reason for outsourcing market wise. In some cases, the firms being put up are large and expansive to the extend that the domestic market can not support the manufacturing facilities in the of the firms. Return on Investment This is one of the reasons why firms invest internationally. Due to the huge capitals invested by the firms and businesses, return on investment is a vital factor for many U.S multinational businesses. It is rather obvious that a company expects returns that are proportional to what has been invested and the only way to do so is by seeking the international market as they will always take care of the surplus productions. This also brings in the problem of patenting of products. Some countries have weak patent protection and therefore the U.S multinationals takes this into account and go ahead to invest internationally for the purpose of preempting imitators thus preventing the host countries from imitating patented products (Cantwell, 1989). This has been witnessed in several occasions where countries end up in the courts of law due to cases of product patenting. Location advantages The multinational firms look for market internationally because of the location advantages. Location advantages include such aspects as proximity to raw materials, cheap raw mater...