The Problems of Transfer Pricing: When You Have Facilities in More Than One Jurisdiction

By Carter, William K.; Maloney, David M. et al. | Journal of Accountancy, July 1998 | Go to article overview

The Problems of Transfer Pricing: When You Have Facilities in More Than One Jurisdiction


Carter, William K., Maloney, David M., Van Vranken, M. H., Journal of Accountancy


When you have facilities in more than one tax jurisdiction.

It's hard enough for a company to do business when it's situated in only one state, but consider the complexities when it adds facilities in another state--or, even worse, when it goes international. In addition to having to prepare multiple tax filings, a business with far-flung facilities suddenly must contend with another complication: transfer pricing--in which local tax authorities view a company division in one political venue as a customer and/or a supplier of a related division in another political venue. The upshot is that the cost of any goods or services the two units exchange must be determined when the company calculates each unit's tax liability.

This article examines the process--including its tax, accounting and corporate profit implications.

If you think transfer pricing affects only big companies, think again. Size is immaterial. The only condition that triggers transfer pricing is the existence of multiple facilities in more than one taxing jurisdiction. For example, a company with 45 employees in five locations in two states would activate transfer pricing concerns if one of its offices provides data processing, payroll or other services to the others. Similar situations arise in manufacturing, when one division ships parts or unfinished products for final assembly at another location in a different jurisdiction.

A key element is a buyer-seller relationship between units of a single company. Although owners and managers may not think of one location as "selling" services or parts to another unit, the various taxing authorities--whether state or national--may impose that view. Under such circumstances, a company has to determine the monetary value of the goods or services and treat that amount as sales revenue of the "selling" unit and as a cost of the "buying" unit. Companies establish transfer prices in a variety of ways. Two of the most popular are by estimating competitive market prices and by adding a markup to costs.

To illustrate, look at Example, Inc., a producer of telephones and related equipment at its Alpha division, which is situated in an urban U.S. community with high taxes on property and income. Competitive pressures combined with those high taxes prompted Alpha to look for lower tax jurisdictions for expansion. An opportunity arose when a supplier offered to sell its entire operation. The supplier has two facilities: one, Beta, is in a state with no income tax; and the other, Gamma, is in Canada, near the U.S. border.

Beta produces a variety of molded plastic parts, including the hard-plastic exteriors or "shells" of telephones, using raw plastic purchased in bulk. Excluding shells, much of Beta's output is shipped to Gamma, where it is combined with purchased parts to create telephone subassemblies. As a result of the planned acquisition, Example will produce shells at Beta for sale to unaffiliated or "outside" entities and also will produce shells for its own use in final assembly at Alpha and for subassemblies at Gamma; some of these subassemblies will be shipped from Gamma to Alpha for final assembly. In addition, Alpha will provide marketing and administrative services for all three locations.

TAX CONSIDERATIONS

A danger that Example will want to avoid is being "whipsawed" between the taxing authorities of two jurisdictions--that is, having its sales revenue from a single source taxed in two jurisdictions because of overlapping or conflicting tax rules. Further, because Alpha is in a high-tax state, any transfer pricing system that shifts taxable income away from Alpha will probably be challenged almost automatically by the state in which Alpha is situated.

In most states, companies compute taxable income using the federal income tax rules as the starting point; however, in determining the portion of their net income subject to tax by each state, companies typically use allocation and apportionment formulas--which, unfortunately, vary from state to state.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Problems of Transfer Pricing: When You Have Facilities in More Than One Jurisdiction
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.