Tougher on Transfer Pricing

Article excerpt

A recent Ernst & Young survey found that transfer pricing-the value assigned to intercompany transfers of goods and services-continues to be the number one tax issue for multinational corporations. It's also an increasingly important issue for governments, judging from the quickening pace of transfer pricing legislation around the world. Just last month the United Kingdom became the fourth government in 1997 to come out with new transfer pricing rules (see box).

"Every government is trying to get its fair share of taxes," says Richard VL. Cooper, partner in charge of Ernst & Young's International Business Services Group. At the same time, every company is trying to avoid double taxationpaying taxes to two or more different governments on the same earnings-while striving to take advantage of differing rates of taxes from one country to another.

Says Ian E. Novos, a manager in the transfer pricing group of KPMG Peat Marwick's economic consulting practice in New York: "The enactment of tougher new laws and the multiplicity of opportunities for companies in this global age are working together hand in glove."

Ernst & Young estimates, for instance, that it saved a medical supply company $300 million over a five-year period by the way it structured the company's business. The existing company, located in a high-tax country in Europe, was converted into a contract manufacturer, which would earn less than a full-fledged manufacturer. All the product designs, trademarks, patents, and other intangible property were placed in a new company, located in a low-tax country. Not only did the new company own the most valuable assets, it also bore all the inventory and collection risks. This company guaranteed the contract manufacturer that it would buy all its output at a modest profit.

A US manufacturer of computer components set up a company in Malaysia to take advantage of its lower labor costs and gain better access to customers, computer manufacturers in Southeast Asia. …