Transfer Pricing and its Negative Impacts on Tax Income Generation in the United States
Transfer pricing comes with negative impacts on tax income generation in the United States. Different entities in the country abuse transfer pricing negatively and the ultimate effect of this practice comes in the form of suppressed tax revenue generation and a broad effect on poverty alleviation and development implementation. However, the impacts of labor disempowerment, poor resource management, distortion of information regarding entrepreneurial development, come with extreme effects in terms of poverty ("Pearson Collections," 2018). A deep analysis of such other impacts suggests that tax dodging causes extreme poverty levels and develops potentially detrimental economic distortions which could hinder sound investment decisions in the economy of the United States.
The Concept of Transfer Pricing
A transfer price is a cost at which different divisions of an organization transact with one another like the trade of supplies or labor factor between departments or subsidiary and parent company. Regulations governing transfer pricing advocate for accuracy and fairness of the cost in question among the associated entities. Regulations implement the arm's-length provision which states that organizations have to establish pricing on the grounds of similar transactions done between different parties, not of the same associated entity, but at arms-length. According to the United Nations Conference for Trade and Development (UNCTAD), there were over 37000 multinational organizations with 175000 subsidiaries as of the early 1990s ("Pearson Collections," 2018). An increment in the volume of trade activities between these related entities resulted in the abuse of the concept for the entities to evade taxation illegally. In the end, the United States economy suffers from the deficiency in revenues that it should be generating in the form of taxes levied on the activities of these entities if they were to operate independently.
Globalization and Its Impact on Transfer Pricing
The modern economic situation is characterized by globalization and liberal trade restrictions, and in this sense, economies and multinational companies have become largely financially intertwined. For the larger part, this situation has come with the stimulation of economic growth globally, hence creating more affordable services and products for customers (Windsor, 2015). However, there is a significant loophole in the taxation system between different countries within the global economy. Different multinational corporations such as Compaq have shifted their highly profitable subsidiaries overseas so that they can benefit from the tax advantage that is not available in the United States (Windsor, 2015). As this practice continues taking place, the United States still has the world's highest corporate rate at 35 percent. After factoring in state taxes, the total levies amount to almost 40% of corporate earnings.
Taxation Disparities and Misleading Financial Statements
In a bid to put this into perspective, the approximate taxation rate of nations that belong to the Organization for Economic Cooperation and Development (OECD) measures at 24 percent. The rate seems high when factoring in tax havens like Ireland that has a corporate tax rate of 12.5 percent. A majority of the international companies do not generate revenues or operate in the tax-friendly nations. However, through corporate inversion and transfer pricing, financial statements are likely to mislead users into thinking otherwise regarding the multinational entities (Windsor, 2015). For a company such as Compaq, valued at $25 billion, the practice is likely to save the firm hundreds of millions of dollars in yearly tax remissions to the federal government of the United States. In totality, transfer pricing seems to largely impact on the economy of the United States negatively through suppressing the country's corporate tax revenue generation by the associated entities.
Positive Effects of Transfer Pricing and Corporate Inversion
Despite the negative effects of taxation on the American economy, the element of transfer pricing and corporate inversion, the two also have positive effects on the economy of the United States. They can cause a greater flow of income into the country; although not to the government, but to the people (Lainez, 2017). In the end, they will increase operations at lower costs as compared to other countries competing for the same market spaces with the United States. A majority of the large multinational entities take advantage of corporate inversion and transfer pricing; their effects can influence the state of employment in the future of the United States. Through expanding operations, the global organizations amass more cash in hand, and ultimately, they are likely to create additional jobs (Lainez, 2017). Also, when an organization's profits go up, the wealth of shareholders does so as well since the prices of stocks are established through actual and projected earnings.
Inversion and Transfer Pricing from an Accounting Perspective
Corporate inversion is often used, but accounting for the practice can be cumbersome for the practitioners and the government. In the function of accounting, transfer pricing records transactions that are done between different divisions of a large multinational entity. The usual accounting concepts treat business organizations as one entity regardless of the number of various operations that exist around the world (Lainez, 2017). However, the federal regulations of taxation treat the subsidiaries of companies as distinct economic factors.
In accordance with the American provisions of taxation, the profits of a body corporate are only subjected to the taxes imposed by the government of the United States when cash is repatriated. For this reason; different global organizations opt to shift high profits to countries that have minimal tax burdens. A company such as Compaq has taken advantage of tax inversion and transfer pricing for more than two decades of large-scale operations around the world. On its side, Apple set up its global headquarters in Ireland because of the low taxation rates in the country (Fuller & Thomas, 2017). Regardless of the country's low taxation rates, Apple pays less than 2 percent in corporate taxes courtesy of a pre-existing agreement that the company had with the Irish government. 90 percent of cash holdings, measuring at $200 billion belonging to Apple are overseas. If Apple's cash holdings were in the United States, the corporation could be subjected to a tax bill of about $60 billion per annum (Fuller & Thomas, 2017).
Negative Impact on Tax Revenues and Economic Development
While these two practices can be potentially beneficial in the context of stimulating economic growth, there are other better avenues of instigating economic growth since inversion and transfer pricing can be detrimental to the country. When the multinational companies start avoiding the United States taxes, the government foregoes billions of dollars in could-be tax revenues which could be utilized in the economic development of the country (Fuller & Thomas, 2017). For instance, if Compaq as an organization could repatriate its overseas cash holdings, it could be exposed to a tax bill of hundreds of millions of United States dollars. Yet, different multinational organizations are still evading the high tax burdens even if the federal government of the United States disposes of a lot of resources in supporting the industries in which these firms operate (Fuller & Thomas, 2017). For the larger part, small consumers and business organizations, in the end, make up the difference in foregone tax revenues by the multinational corporations.
References
Fuller, P., & Thomas, H. (2017). The Tax Inversion Problem: A Hard Nut to Crack.
Lainez, J. (2017). Holding US Corporations Accountable: The Convergence of US International Tax Policy and International Human Rights.
Pearson Collections. (2018). Collections.pearsoned.com. Retrieved 1 May 2018, from https://collections.pearsoned.com/student/#print/0ac6084d-5b46-1a41-815b-67e93fff02c9/0/13
Windsor, D. (2015, July). Public Policy Avoidance: Economic Patriotism and Social Responsibility in Corporate Inversion, Other Tax Avoidance, and Regulatory Haven Decisions. In Proceedings of the International Association for Business and Society (Vol. 26, pp. 142-154).
