Question

Explain and evaluate the concept of transfer pricing and how it relates to the above quotes. You should address the issues including (but not limited to) the social, political, financial and ethical implications on business and broader society

Answer 1

Transfer pricing refers to the price that is charged for goods and services that are transferred between related parties. In cases where goods and services are transferred from one unit of an organization to another unit (or units) of that organization that are mostly situated in different countries the price at which the transfer takes place is known as transfer pricing. With reference to the quote while transfer pricing is meant to ensure optimal allocation of costs and revenues within an organization many companies use it for the sole purpose of tax avoidance.

Transfer pricing is associated with various different issues and implications including social, political, financial and ethical implications on business and broader society. The social and political impact of transfer pricing is that it leads to flight of capital from one society and country to another society and country. As such it disturbs the capital allocation balance in the society at large. The mechanism of transfer pricing for tax avoidance is to take advantage of different tax regime in different societies and different countries. This leads to a flight of capital and disturbs the capital allocation process in the society at large. Political implications are integrated with financial implications on the business and society to a large extent. Tax avoidance related to transfer pricing weakens the political system mainly the regulatory system as the system is not able to prevent the companies from avoiding taxes. Shortcomings of the political and regulatory system come to the fore. To overcome this regulatory bodies are now contemplating a formulary apportionment. This will be a unitary taxation method and will help in plugging tax avoidance. Ethical implications are based on the principle of businesses avoiding taxes in an unethical manner and this leads to dilution of perception of a business and its brands in the minds of consumers.