Transfer pricing is the system that multinationals use to control their expenditure on taxes and costs. The strategy has both benefits and demerits. Examples of such benefits include:
- Tax advantages – Transfer pricing helps multinationals control their expenditures on (corporate) taxes by paying taxes in only the nations where specific revenue generation activities occur. The strategy helps in avoiding multiple taxations of multinationals. Google’s operations in Singapore provide the best example of this facet.
- Cost control – the ability to transfer income to subsidiaries in low-cost regions grants multinational the potential to incur low costs for profit maximization.
- Avoiding punitive tariffs on items – Transfer pricing makes it hard for nationals to disrupt multinational operations through taxes. The strategy allows multinationals to continue operations even when other international players cannot operate due to punitive laws.
- Income control – Transfer pricing allows multinationals to maximize income and revenue generation by focusing on nations or regions promising more revenue generation. Google’s operations in Singapore provide the best example of this facet.
Disadvantages of transfer pricing, on the other hand, include:
- Potential utilization for tax avoidance – Operating in low taxation regions through transfer pricing allows multinationals to avoid hurting taxes in areas like America. Microsoft and Google use this trait to avoid the 35% U.S. corporate tax and pay about 19% in regions like Singapore.
- Possible legal suits – Transfer pricing often exposes corporations to the issue of avoiding taxes, which leads to potential lawsuits and punishments.
- Comparable data absence – Many transfer pricing methods require similar data when deciding the charges. Such data is often unavailable, exposing the firms to significant constraints.
- Can cause unnecessary business shifts – Multinationals often shift income to different regions to control taxation costs under the pricing transfer facet. The move often hurts consumers in the areas avoided by corporations, as consumers have to pay more to get commodities. The practice, therefore, exposes transfer pricing to misuse and promotion of unfair business practices.