Assignment 4: Intercompany Pricing Due Week 10 and worth 320 points Transfer pri
ID: 2329838 • Letter: A
Question
Assignment 4: Intercompany Pricing
Due Week 10 and worth 320 points
Transfer pricing is important to multinational entities and tax administrators. Transfer pricing involves transactions between affiliated entities domiciled in different countries creating different tax requirements. Profit determination of multinationals generated by intra-company transactions is one of the most challenging issues in international taxation.
A multinational company with cross border transactions in two (2) foreign countries has engaged you to provide advice on intercompany pricing to achieve the lowest combined taxes for all jurisdictions. The company manufactures and sells cars in the U.S. and two (2) foreign countries.
Using the Internet or Strayer Learning Resource Center, research the rules and techniques for transfer pricing. Choose two (2) foreign countries and research their respective tax rates.
Write a five to seven (5-7) page paper in which you:
Based on your research, create projections of revenues, costs, and tax rates based on the two (2) countries researched and the U.S.
Create a scenario in which you allocate revenues and costs to each country to determine the lowest possible overall tax for each country. Provide support for your allocations.
Propose a scenario to the client that will result in a favorable tax position. Provide support for your position.
Analyze how the Internal Revenue Service (IRS) uses Internal Revenue Code (IRC) section 482 to prevent shifting of profits to other countries to reduce U.S. tax liability.
Assume that the IRS has challenged the allocations and is preparing to audit the client. Prepare a brief position to defend the client to IRS. Provide support for your position.
Evaluate two (2) tools IRS agents have available to perform the audit on multinational transfer pricing issues.
Use at least five (5) quality resources in this assignment. Note: Wikipedia and similar Websites do not qualify as quality resources.
Format your assignment according to the following formatting requirements:
Explanation / Answer
USA
Section 482 of the Internal Revenue Code 1986 provides the statutory basis for regulating transfer pricing. Treasury Regulation Section 1.482-1(b) states that “in determining the true taxable income of a controlled taxpayer, the standard to be applied in every case is that of a taxpayer dealing at arm's length with an uncontrolled taxpayer.”
Trends and developments.
There have been only minor technical modifications to the transfer pricing regulations in recent years.
Recent transfer pricing cases decided by the US Tax Court include:
Appeals are pending in Medtronic, Amazon and Altera. In addition, high-profile cases involving Coca Cola and Microsoft are pending in the courts.
Income taxes in the United States are imposed by the federal, most state, and many local governments. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.
Marginal tax rates for 2018
Marginal Tax Rate
Single Taxable Income
Married Filing Jointly or Qualified Widow(er) Taxable Income
Married Filing Separately Taxable Income
Head of Household Taxable Income
10% -
$0 – $9,525
$0 – $19,050
$0 – $9,525
$0 – $13,600
12%-
$9,526 – $38,700
$19,051 – $77,400
$9,526 – $38,700
$13,601 – $51,800
22%-
$38,701 – $82,500
$77,401 – $165,000
$38,701 – $82,500
$51,801 – $82,500
24%-
$82,501 – $157,500
$165,001 – $315,000
$82,501 – $157,500
$82,501 – $157,500
32%-
$157,501 – $200,000
$315,001 – $400,000
$157,501 – $200,000
$157,501 – $200,000
35%-
$200,001 – $500,000
$400,001 – $600,000
$200,001 – $300,000
$200,001 – $500,000
37%-
$500,001+
$600,001+
$300,001+
Russia
Russian rules on transfer pricing are set out in the Tax Code (arts. 20, 40, section V.1) as significantly amended in 2011. These amendments became effective on January 1, 2012 (some of the provisions were deferred to take effect in years 2013 and 2014). The previous rules on transfer pricing had been in force since 1999, but were rarely applied in practice. It is likely that these new transfer pricing rules will now become one of the priorities of the tax authorities. The issue requires a lot of attention as the new transfer pricing rules do not enable to claim that one single price could be objectively ruled as being the only possible price among other prices depending on the details of the transfer pricing method used. Therefore the tax authorities will have ample room for mounting a challenge to the prices applied by taxpayers. A taxpayer must therefore be prepared to justify the prices applied regardless of his chosen transfer pricing policy hence the need for diligent documentation of the applied transfer prices.
Exceptions to transfer pricing rules:
Some types of transactions are exempt from transfer pricing controls by virtue of law; these are:
a. Transactions between parties to a Consolidated Group of taxpayers (except for transactions with minerals);
b. Transactions in which the following criteria are met simultaneously:
• both parties are registered in the same region in Russia;
• neither party has subdivisions in any other region in Russia;
• neither party pays profit tax in other region in Russia;
• neither party has recorded any tax losses for profit tax purposes;
• neither party applies a special tax regime (Unified Tax on Imputed Income, Unified Agricultural Tax, Mineral Extraction Tax) or is exempt from corporate profit tax, applies a 0% corporate profit tax rate, or is a resident of a special economic zone.
In Russia, the Personal Income Tax Rate is a tax collected from individuals and is imposed on different sources of income like labour, pensions, interest and dividends. The benchmark we use refers to the Top Marginal Tax Rate for individuals. Revenues from the Personal Income Tax Rate are an important source of income for the government of Russia
Russia Taxes. Rates
Corporate Tax Rate. 20.00
Personal Income Tax Rate. 13.00
Sales Tax Rate. 18.00
Social Security Rate. 47.50
Social Security Rate For Companies. 47.50
Social Security Rate For Employees. 0.00
Germany
In recent years, German legislation has increasingly focused on transfer pricing and has incorporated the principles outlined by the Organisation for Economic Cooperation and Development (OECD), including many aspects of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS). This has led to a number of amendments to the Foreign Tax Act and the General Fiscal Code (eg, the imposition of higher standards of transfer pricing documentation and the application of the arm’s-length principle with regard to permanent establishments).
The dealing at arm’s-length principle is the core element of the German transfer pricing legislation as outlined in Section 1(1) of the Foreign Tax Act. The arm’s-length principle under the act is applicable to cross-border transactions, including the allocation of profits between headquarters and permanent establishments.
Broadly speaking, the domestic understanding and interpretation of the arm’s-length principle corresponds to the principles outlined in Article 9 of the OECD Model Tax Convention, with some modifications (eg, Section 1(1)3 of the Foreign Tax Act stipulates that for the application of the dealing at arm’s-length principle, it has to be assumed that unrelated parties have complete knowledge of all relevant facts and circumstances of the business transaction (ie, information transparency) and act like prudent and conscientious business managers).
However, following a decision by the Federal Fiscal Court, which interpreted Article 9 of the OECD Model Tax Convention in a specific case in a manner that deviates from the view of the German tax authorities, a change of the Foreign Tax Act was discussed in the political arena in such a way that the dealing at arm’s-length principle under Article 9 of the respective double tax treaty must be interpreted in line with the Foreign Tax Act. Although changes to the act have not yet been implemented, it cannot be entirely ruled out that changes will be implemented in the near future.
The dealing at arm’s-length principle also applies to domestic transactions (eg, as an element for the assessment of hidden profit distributions).
Tax rates in Germany:
Germany taxes. Rates
Corporate Tax Rate. 29.79
Personal Income Tax Rate. 47.50
Sales Tax Rate. 19.00
Social Security Rate. 40.21
Social Security Rate For Companies . 19.43
Social Security Rate For Employees . 20.78
Marginal Tax Rate
Single Taxable Income
Married Filing Jointly or Qualified Widow(er) Taxable Income
Married Filing Separately Taxable Income
Head of Household Taxable Income
10% -
$0 – $9,525
$0 – $19,050
$0 – $9,525
$0 – $13,600
12%-
$9,526 – $38,700
$19,051 – $77,400
$9,526 – $38,700
$13,601 – $51,800
22%-
$38,701 – $82,500
$77,401 – $165,000
$38,701 – $82,500
$51,801 – $82,500
24%-
$82,501 – $157,500
$165,001 – $315,000
$82,501 – $157,500
$82,501 – $157,500
32%-
$157,501 – $200,000
$315,001 – $400,000
$157,501 – $200,000
$157,501 – $200,000
35%-
$200,001 – $500,000
$400,001 – $600,000
$200,001 – $300,000
$200,001 – $500,000
37%-
$500,001+
$600,001+
$300,001+