Risk versus Return Relationship for Transfer Pricing

• In Event: Transfer Pricing and Revenue Recognition

Abstract

U.S. based Multinational Corporations (MNC's) shifting profits offshore to foreign countries in which they do business has been an ongoing issue with which the U.S. Government and IRS have reviewed and revisited on numerous occasions. The current tax code makes this shift of profit completely legal as long as the MNC adheres to setting the transfer price at arm’s-length. The profits of foreign subsidiaries of U.S. corporations in 18 tax havens soared from $88 billion in 1999 to $149 billion in 2002 (E&Y 2009). The IRS has tightened its enforcement of transfer pricing in recent years and President Obama has proposed transfer pricing reform. In addition, the Organization for Economic Co-operation and Development (OECD) amended their Transfer Pricing Guideline in 2010, as there was a lack of international guidance in this area. This paper looks to examine the risk and return relationship a company faces when shifting their profits offshore. More specifically, does the transfer pricing penalty and scrutiny with which the country examines transfer prices deter MNC’s from shifting their profits offshore? Or are MNC’s willing to take on the risk of a transfer pricing audit, repayment of tax underpayment and potential penalty or in order to avoid paying more taxes?

Author

• Caitlin Finning Golden, Bridgewater State University