Sophisticated Pricing Techniques

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

Summary

The article “Most U.S. firms paid no taxes over 7-year span” by Carolyn Said, discusses how almost two thirds of U.S. companies did not pay income taxes to the government between 1998 and 2005. While it does admit that many of these companies were small and little to no profit, about a quarter of corporations that had over $250 million didn’t have to pay taxes either. The way that this avoidance of taxes is achieved is through what is called “transfer pricing abuse”. Transfer pricing is when, in your company, you increase the prices on goods and services being moved from one part of the company to another. Prices technically should be set using an arm’s length standard, meaning that prices should be set within a reasonable distance of the market rate. This can be viewed as a creative form of accounting and is not technically illegal. For example, a business unit in the U.S. with a foreign parent company can write off profits that they make because the parent company has “overcharged” them for odd goods and services such as using the corporate logo.

Discussion

A problem arises however when with the use of transfer pricing and its ethical complications. On one side of the argument, citizens would prefer for large multimillion dollar companies to support the domestic government by paying the appropriate amount of federal income taxes. It’s easy to take this stance when budgets and company performance aren’t at the forefront of importance. However, in a capitalistic, profit maximizing economy everyone wants to pay as little taxes as possible to reduce their costs. Companies, just like the average tax payer, have the right to earn as many tax benefits and write offs as they can find. Taxpaying citizens go out of their way to avoid paying higher than necessary taxes so why can’t a corporation do the same? Transfer pricing is not illegal so the companies have the right to take advantage of it. If companies abuse transfer pricing to an extreme extent, although it is still legal and they have that right, it begins to fall into a grey area of what is saving and what is going beyond ethical and appropriate acts.

Real-World Example

There are many other types of sophisticated pricing techniques. Not all are used to avoid paying income taxes such as transfer pricing. One example is bundling that media and communication corporations such as Comcast use to draw customers into purchasing multiple services from them. For example, Comcast charges $70 per month for cable and internet whereas the internet package by itself is $50 and the cable package is $30. This sophisticated pricing technique is an attempt by companies to attract customers with what they perceive as saving more by convincing them that they’re getting a much better deal than what they actually are.

Posted by Laurel, Patrick, Kyle and Case (Section 1)

Resources:

www.comcast.com/shop

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