Sophisticated Pricing Strategies Blog Post

Discussion on Most US Firms Paid No Taxes Over 7-Year Span” by Carolyn Said (SF Gate, August 2008)

About two-thirds of US companies and foreign firms in this country paid no income taxes from 1998 to 2005. Although many of these non-payers were new, small companies that actually didn’t make any money, a quarter of companies with more than $250 million in assets or $50 million in gross receipts paid no income taxes.

There are a few legal ways that companies can dodge taxes, including writing off losses from the previous year, tax exemptions from expenses, or even writing off liabilities from stock options. However, there are a few other, less palatable ways that companies can duck paying income tax, including “transfer price abuse.” This practice shifts money within corporate subsidiaries by inflating the fees associated with the goods as opposed to charging the going market rate. This is made even easier by having an off-shore parent company to blame, since off-shore profits are tax-free.

Transfer price abuse is relevant to our class, especially in relation to our recent lesson on transfer pricing, where “the price set by the transferring division becomes the cost of the receiving division.” It is important to find the optimal transfer price that ensures the company’s profit maximization and that the transferring division will continue to produce the product efficiently. Transfer price abuse inflates the cost, which may interfere with producing the product efficiently. However, it allows the company to exaggerate their costs and pay a lower amount of income tax.

This abuse of transfer pricing is unethical as it provides misleading information regarding the state of the firm that could potentially influence the decisions of investors. Firms have an obligation to its investors to be honest regarding the state and value of their firm and by abusing the use of transfer pricing they are going against this core value. The taxes that these firms are avoiding by engaging in transfer pricing are to be used to benefit the country as a whole. By abusing transfer prices they are eliminating a portion of funds that would be used for the masses, which does not reflect positively on the firm as a whole. It is understandable that firms are looking to avoid taxes; however, going to the extent of many of these firms by not paying any taxes for seven years is crossing the line and ought to be addressed and regulated.

A similar issue of transfer pricing can be seen in the current state of Nigeria. According to reports done by PriceWaterhouseCoopers, Nigeria has lost a large amount of tax money due to transfer pricing. Tax earnings, excluding the taxation on oil revenue, in Nigeria make up approximately two percent of GDP while in other countries this can be as much as thirty five percent. By monitoring transfer pricing and clearly stating rules and regulations which ought to be followed, Nigeria could increase their earnings from taxes by a great deal as they are losing close to a million naira (their national currency) (Eboh, 2012). This shows that this is not just an issue with large firms in the US but can be detrimental to nations around the world.

Posted by Mick, Charles and Rachel (Section 3)

Resources:

Eboh, Michael. “Nigeria losing trillions from non-regulation of Transfer Pricing – PWC.” April 6, 2012. Retrieved from: http://www.vanguardngr.com.

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