Tech Sonic Transfer Pricing: A Case Study

Compared to every other domestic industry, the semiconductor industry is unique. It is perennially one of America’s top exports, and every year, chip makers and designers dramatically increase the performance of their products while decreasing prices, making high-end technology goods increasingly productive and affordable for consumers.

Intel has a long history and a great reputation of designing and manufacturing microprocessors. Intel also designs and manufactures hardware and software for cell phones. Intel’s mission is to be the leading provider of microprocessors to the world. To achieve this goal, it is critical for the company to stay competitive, significantly increase production and keep costs low. Building a factory in locations like Costa Rica will ensure overhead costs are low and will provide brand name presence by placing factories in different parts around the world.

The "transfer pricing" provision attempts to identify the taxable income had the transaction been between unrelated parties dealing at arm's length.

(TCO 10) How is a transfer price determined? Describe the cost-based method. Do you think it is better than the market-based method?

The resulting data was then analyzed for each structure. A regression equation was provided and resulting annual salaries for each position based on allocation of evaluation points was calculated. A table providing minimum, first quartile, average, median, third quartile, and maximum pay for each position in the structure based on the data was also provided. Using this information and the pay policy level decisions on whether or not to lead or lag the market a preliminary pay level for each position was also reached. Whether or not to overlap pay grades came into consideration when deciding on the spread for each structure. Depending on overlap in compensable factors between structures a spread of 50% or 10% was chosen. For example, in the customer service structure the positions have little in common and thus a 10% spread in order to have no overlap was chosen while for the software engineering structure the positions included a lot of overlap in knowledge and skills thus the spread of 50% was chosen.

As this is an international transfer, there are even more considerations that become relevant. For example, the corporate tax rate applied in North American versus Europe should be considered. Furthermore, management should look

and the foreign distributor, often ensure an extensive portion of the financial costs are absorbed by

However, the companies only have to pay the U.S. tax for foreign revenues once they bring the profits back to the United States. As a result of these current tax laws, U.S. companies that seek to avoid high corporate tax rates hold their foreign earned profits overseas. “It just makes no sense to pay a substantial tax on it,” said Joseph Kennedy, a senior fellow at the Information Technology and Innovation Foundation (Rubin, R.). It is far too easy for an IT corporation to create a patent in a foreign country and direct revenue to a corporation within that country, thus avoiding the much higher U.S. tax rates. According to Joint Committee on Taxation estimates, the lost revenue is increasing over time as corporations find even more creative ways to make their U.S. profits look like offshore income (Richards, K., & Craig, J.). As result, multinational American corporations have as much as $2 trillion held in overseas subsidiaries and if brought into the United States with the current tax laws, the federal government could benefit by nearly $50 billion per year.

It may be argued that many US corporations moves their business to overseas in inversion deals as US has highest corporate tax rate in the world. By lowering US corporate tax rate, these companies will bring back their profits to US;

The main objective of many companies is to minimize their tax obligations. Jeffers (2014) discussed the reason of why companies adopt tax inversion strategies. The researcher indicated that the income maximization is a major reason of companies attempting to reduce their tax liability (pp. 100-101). Tax inversion strategies provide companies an advantage to lower income tax rate. Today, U.S. corporations renounce its U.S. citizenship and move to low-tax countries. Companies that reincorporate oversees are not obligated to pay U.S. taxes on earning income (p. 99). Many countries implement tax competition strategies to attract and retain businesses. Well-known companies, such as Exxon Mobil, Hewlett Packard, Tyco, General Electric, PepsiCo, etc. take benefits of tax shelter opportunities overseas (p. 102). Other benefits of the jurisdiction abroad are flexible banking laws and simplified litigation processes.

The Australian Taxation Office (ATO) showed that a third of Australia’s top 1,500 corporation including brands like Qantas, Virgin Australia, General Motors, Vodafone, ExxonMobil, LendLease and the Ten Network didn’t pay tax in 2013-14 (Triplej Hack 2015, p.1). A resent example, is that Singapore marketing hub has been accused for routing its profits and now BHP Billiton has defended Singapore. BHP has requested that the Australian Taxation to pay a $1 billion dispute. The ATO is headlining that serval companies use Singapore because the corporate tax rate is at 17% (Khadem, N 2017, p.1). However, Apple is a good example because the company pays its taxes in every country around the world, and is considered the largest taxpayer in the world.

Intercompany transactions could occur across national borders, it would lead MNC companies to get more exposure to the differences of the tax regulations between countries. This might lead MNC companies to set up their objective to minimize their taxes through the use of discretionary transfer prices. These issues are attracted the attention of the member of the U.S. senate, foreign governments and international organization such as the OECD, G20 and European Union (EU).

that if companies want to take their operations overseas, then tax the companies extra for

By doing producing in countries with more relaxed taxes, the companies are keeping more of their profits.

The business level strategy of Samsung’s memory chip business unit is an integrated strategy. Remarkably, they have both a cost advantage and a value advantage over their competitors. In this section we will describe how Samsung “widens the wedge” through cost and value drivers. The data presented in Appendix 1 shows that Samsung’s cost advantage accounts for majority of their competitive advantage.