Microeconomics Case Study

Transfer Pricing

OR

Abstract:
Rapid globalisation has seen increasing levels of intra-firm trade between affiliates situated in different countries. Companies frequently shift profits to low tax jurisdictions in order to maximize returns. This is most commonly done through 'transfer pricing' of tangibles and intangibles between group companies. However, despite the tightening of transfer pricing litigation around the world, laws are difficult to implement because they involve significant levels of interpretation as to where value is actually created.

Pedagogical Objectives:

To discuss the issues relating to tax avoidance/evasion by shifting profits to low tax countries through transfer pricing.

Keywords : Microeconomics Case Study, Transfer pricing and arm's length pricing, Comparable uncontrolled price, Avoidance of double taxation, Standard cost system, GlaxoSmithKline and Compaq Computer Corporation, Comparable profits method, Seagate Technology Inc, Cost plus method, Royalty payments, Tax avoidance, Activity based costing, Internal Revenue Service, Weighted average sale price, Standard material, manufacturing cost, Profit split method