Implication of Abusive Transfer Pricing Practices for Accountants & Auditors

• In Event: Transfer Pricing and Revenue Recognition

Abstract

Transfer pricing practices employed in today’s global marketplace is largely due in part to the tax and other benefits that can be attained. This phenomenon exists in domestic markets where different states attract investment by undercutting sales tax rates, leading to outflow from one state to another but is even more prolific and troublesome in multinational enterprises (MNEs). The goals of transfer pricing within MNEs differ from those of strictly domestic transfer pricing primarily because of the benefits involved. While this can get complex when the two divisions are in the same country, it becomes even more complicated when the divisions are based in differenct countries. In MNEs, not only are there tax implications, but there may also be profit manipulation and possibly fraud. Thus, the amounts involved in the transfer prices may be exaggerated in an effort to pay only minimum taxes and increase the overall income of the corporation. In effect, this translates to the movement of one nations’s tax revenue to another. In many cases, the amounts of these exaggerated transfer prices may be material at not only the transaction level, but also may be significant from a global economic perspective with respect to the total amount of intra-firm trade across national borders. This paper discusses common transfer pricing strategies employed by MNEs as well as the implications for accountants and auditors. We make suggestions that can be employed by accountants and auditors to ensure that they maintain the highest degree of integrity while at the same time serving their clients, financial statement users and the general public.

Author

• Agatha E Jeffers, Montclair State University