ACCT618 Unit 5 Individual Project

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GLOBALIZATION Globalization Domonique Jones Professor: Treisha Thorpe ACCT618-2304B-01 Taxation and Business Decisions 10/31/2023

GLOBALIZATION Globalization What does transfer pricing entail? Why is it a matter of significance for the Internal Revenue Service (IRS)? The term "transfer price", or also referred to as the "transfer cost", pertains to the exchange of goods or services between related parties. This is particularly evident in transactions conducted among different departments within an organization (Tuovila, 2022). Multinational companies commonly utilize transfer pricing tactics as a way of avoiding taxes and maximizing their profits by redirecting income from high-tax areas into more favorable ones. As such, it is essential for entities like the IRS to monitor these activities closely since they significantly impact how funds are allocated domestically versus internationally (Seth, 2022). By manipulating transfer prices based on varying tax rates across countries, businesses can reduce overall taxable earnings through charging higher costs amongst divisions situated in higher taxed regions while implementing lower prices towards those located elsewhere with more lenient policies – consequently leading to increased net revenue generation (Seth, 2022). The Internal Revenue Code's Section 482 gives the IRS the power to modify the earnings, write-offs, incentives, or nominations of related taxpayers to deter tax avoidance and achieve true representation of their income. Typically speaking, regulations established under this section imply that fees assessed between affiliated entities on transactions involving product transferals as well as intangibles "comport with" those charges warranting agreement if independent parties had performed such dealings amidst similar conditions (Internal Revenue Service, n.d.).

GLOBALIZATION To avoid excessive taxes through transfer pricing, the IRS has enforced numerous laws and regulations. One measure that guides companies is the "arm's length principle," which advises them to establish prices comparable to those charged by an unrelated entity in a similar transaction. In contrast, the "best method rule" obligates businesses to determine transfer prices using reliable methods exclusively. Additionally, as it could significantly impact tax surcharges of corporations venturing into global markets, deciding on appropriate transfer strategies for them becomes crucial. To prevent legal punishments or financial penalties imposed by the IRS authorities settling arguments strategically should be prioritized by these entities when dealing with inter-company transactions involving different countries' currencies/market rates/tax systems/and so forth. Why does a company use transfer pricing? Transfer pricing is an approach adopted by organizations to decrease the overall tax expenses of their parent company. In addition, multinational firms use transfer pricing for internal product or service exchange among subsidiaries and divisions to align interests towards achieving common goals. Various purposes can be served through transfer pricing like allowing multinationals to tap into international tax planning opportunities while maximizing profits via shifting them where taxation costs are lower. Multinational businesses benefit from millions worth of savings on taxes by setting prices at levels that reduce their total burden across inter- corporate transactions. Note: The rewritten version aims for better readability without comprinput.ng on accuracy compared with the original text provided as input. Despite its benefits, transfer pricing has several drawbacks. One of the most significant is that it can be abused and exploited for tax evasion purposes. Multinational corporations (MNCs) may artificially price their intra-company transactions at low levels to avoid paying taxes in

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GLOBALIZATION countries with high taxes, thereby transferring profits from these nations to low-tax ones. Such practices not only damage MNCs' reputations but also fuel hostilities between nations while complicating accurate transfer-pricing calculations, resulting in disagreements and even penalties. In what ways can an employee be impacted by transfer pricing? Can the decision to expand internationally be influenced by transfer pricing considerations? Employee remuneration may be impacted by changes in transfer pricing. If decisions on tax obligations and transfer pricing are postponed until the last moment that is possible, managers who base a part of their compensation on profitability of division may feel discouraged following the new 12-month calculation (Eagan, 2021). Transfer pricing can affect employees in multiple ways: if it results in decreased earnings for a subsidiary or specific division, this could lead to wage cuts or job losses; conversely, if an effective method is implemented that improves profits through transfer prices strategy, there might be incentives offered to employees such as salary hikes. The decision to expand internationally can be impacted by transfer pricing. Before venturing into a new market, an organization needs to assess the possible tax advantages and disadvantages associated with its transfer pricing approaches. If the destination country boasts lower taxes than its home base, this would make for an enticing prospect; however, should that same nation has stringent laws related to transfer pricing or if there is reluctance towards possible taxation difficulties, said business could choose to either abstain from pursuing opportunities in the region entirely or adjust their conservative approach accordingly. To sum up: Transfer Pricing has both positive and negative impacts on human resources and therefore companies are compelled to consider this crucial aspect while determining whether they want

GLOBALIZATION international expansion ventures undertaken within them. Business organizations need caution before committing themselves wholeheartedly with regards their trusty Transfer Pricing plans because non-compliance with governmental regulations isn't acceptable under any circumstances whatsoever- hefty fines will ensue as well as other legal problems hereby arising. How does transfer pricing affect financial reporting and tax planning, and is it morally justifiable for a company to employ this practice in their favor? It is important for businesses to understand how transfer pricing can impact their tax planning and financial reporting. This practice, which involves determining the distribution of profits and losses among different companies, has implications for multinational corporations' financial statements. When transfer pricing isn't based on market rates, but rather self-interested assessments known as "arm's length," it may result in inaccuracies or a lack of reliability in company accounts. Such inconsistencies could invite an array of issues ranging from transparency lapses to legal complications - hence why ensuring precision around record-keeping practices relating transfers remains essential particularly regarding taxation uncertainties with transferring between regions and nations (ShineWing TY TEOH, 2022). Businesses must also note that foreign laws play into these considerations when preparing international reports influenced by distinct governing bodies worldwide across a variety of jurisdictions globally aligned with appropriate regulations stands paramount during this process. The overall tax strategy of a multinational corporation can be significantly affected by transfer pricing. MNCs may opt to shift their increased profits by transferring operations to countries with lower taxation rates and setting advantageous prices for transfers as a means of minimizing their overall tax liability. Non-compliance with the legal guidelines on transfer

GLOBALIZATION pricing or policy regulations in locations where an MNC conducts business could result in either tax evasion or avoidance. A company can engage in transfer pricing without moral issue if it abides by the legal and regulatory framework of its operating country. However, if a business utilizes aggressive transfer pricing tactics to evade or minimize taxes, an ethical dilemma may arise. Moreover, companies must consider their branding and reputation when implementing such strategies since active tax avoidance could create negative perceptions about fair taxation practices. To sum up, transfer pricing should be carefully considered by multinational companies when expanding into global markets due to its notable effect on reporting financial information and planning for taxes. Even though it may not always be unethical for a company to employ pricing for transfer strategies, they must stay informed about the legal and regulatory environment as well as the potential consequences on their reputation and image. This is crucial information that cannot be overlooked. Investigate a company that presently employs or has previously employed transfer pricing and provide reasons for why you believe it made this decision. The discourse concerning the connection between the United States and pharmaceutical industry typically centers around healthcare and tax regulations. In contrast to other nations, where controls are more stringent, pharmaceutical corporations can levy elevated prices in America; consequently, accounting for roughly 50% of their worldwide income. (McClure, 2021) Among the firms that pioneered transfer pricing, Pfizer - a prominent pharmaceutical company - is notable. Transfer pricing is an approach employed by several multinational

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GLOBALIZATION corporations to augment gains while diminishing tax responsibilities. By setting prices for these operations above or below market rates, businesses can modify their income and taxes linked with such activities accordingly. For instance, one firm may provide reduced-rate deals to its affiliate in countries charged high levies whereas it might charge exorbitant fees from independent parties purchasing identical goods/services elsewhere instead of them. This way they can diminish earnings generated within highly taxed areas whilst increasing those derived from lowly-taxed regions thereby ensuring profitability overall. ` Pfizer created subsidiaries in countries with lower tax rates, including Ireland and Luxembourg, to reduce its tax burden. A notable example is Pfizer Ireland Pharmaceuticals which recorded a profit of the American parent company earned $11 billion in 2011 declared a shortfall of $2.3 billion. By exploiting Ireland's corporate tax rate of merely 12.5%, as opposed to America's high rate of 35%, Pfizer was able to minimize its taxes owed significantly via transfer pricing tactics at the cost of accusations that it steered clear from paying billions worth of U.S taxes – accusations which were investigated starting from 2014.The situation eventually led to negotiations between the pharmaceutical giant and the U.S government over payment for back taxes amounting to approximately $35 million; initially denying any wrongdoing throughout investigations. In the end, Pfizer utilized transfer pricing to lower their tax load and boost profits. By conducting transactions with affiliated parties, they took advantage of lowered tax rates in certain countries and redirected earnings there to decrease overall taxes owed. Despite being an acceptable tactic within legal bounds, this practice has generated disagreement and disapproval - organizations who implement it face public scrutiny and potential backlash from authorities.

GLOBALIZATION References Eagan, J. (2021, February 10). The case of the disappearing bonus: Exploring the impact of leaving transfer pricing adjustments to year-end. https://insightsoftware.com/blog/exploring-the-impact-of-leaving-transfer-pricing- adjustments-to-year-end/#:~:text=Transfer%20pricing%20changes%20can%20affect %20employee%20compensation&text=If%20decisions%20about%20transfer %20pricing,the%20new%20year%2Dend%20calculations Internal Revenue Service. (n.d.). Transfer pricing. Internal Revenue Service. https://www.irs.gov/businesses/international-businesses/transfer-pricing McClure, H. (2021, January 25). Transfer pricing aspects of taxing the pharmaceutical sector. Edgar Stat. https://www.edgarstat.com/blog/transfer-pricing-aspects-of-taxing-the-pharmaceutical- sector/ Seth, S. (2022, March 17). Transfer pricing. Investopedia. https://www.investopedia.com/terms/t/transfer-pricing.asp Shine Wing TY TEOH. (2022, October 4). Transfer pricing and how it affects financial reporting - shine wing. https://shinewingtyteoh.com/transfer-pricing-financial-reporting

GLOBALIZATION Tuovila, A. (2022, April 28). Transfer price: What it is, how it's used, and examples. Investopedia. https://www.investopedia.com/terms/t/transferprice.asp

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