TRANSFER PRICING AND ARM'S-LENGTH STANDARD

• Published in: American journal of business research (Cary, N.C.) N.C.), 2013-11, Vol.6 (1), p.49
• Main Authors: Chiang, Bea, Del Gaudio, Brian
• Format: Article
• Language: English
• Subjects: Apportionment; Corporate profits; Corporate taxes; Double taxation; Intangible assets; Internet stocks; Multinational corporations; Prevention; Prices; State court decisions; Stock options; Studies; Subsidiaries; Tax courts; Tax rates; Transfer pricing
• ISSN: 1934-6484

Transfer pricing is a pricing method used for transactions for tax purposes. A standard called the arm's-length standard was created to aid in setting a transfer price and simplify the process to prevent double taxation for multinational companies. Over the years, the standard has created problems for multinational corporations and the commissioner of the Internal Revenue Service (IRS) in relation to arm's-length standard transactions. Cases between multinational corporations and the IRS are reviewed to discuss the use of the arm's-length standard and the disagreements concerning the treatment of employee stock options, cost sharing agreements, and buy-in payments in relation to the arm's-length standard. The analysis of these cases sheds some light on how the arm's-length standard of transfer pricing is diminishing in its effectiveness as a rule to set transfer prices. The paper suggests that the arm's-length standard of transfer pricing be modified or the formulary apportionment approach be implemented to alleviate potential problems of setting up transfer pricing. [PUBLICATION ABSTRACT]