Transfer Pricing Fraud
Transfer pricing is a negotiation between related but singular companies. Frequently the relationship is that of a parent and subsidiary company. In this situation, the parent company needs to purchase goods from the subsidiary, but since the transfer of goods is internal, the negotiation of price is also internal. Although the subsidiary company might grant a special price for the parent company, the deal is still legal in this case. The point when it becomes illegal is when the transfer is used to manipulate the market. Often it is used so that a parent company may take advantage of a subsidiary company, using it to evade taxes.
Recently, companies in the United States have become increasingly liberal with their application of transfer pricing. U.S. companies accumulated $1 trillion in offshore profits, none of which was taxed by the close of 2009. The majority of this money was earned from transfer pricing money shuffling, including the creation of a paper trail between subsidiaries of one company to assign costs and revenues to selected countries. The convenience of abuse between subsidiary companies makes transfer pricing a top priority for the IRS.
Transfer pricing can also be used to dodge taxes by making the products transferred appear to be worth less than they are. Once the product price is deflated, the company appears to be making very little profit. Once a company makes very little profit, they only pay very little taxes.
It is important to remember that every instance of tax fraud is harmful to every person in the U.S. When it comes to tax fraud that involves companies on such a large scale, it is especially hurtful to the whole country. The money lost by the taxpayers of the U.S. is estimated to be in the tens of billions. Basically every taxpayer is paying extra so that the corporations can make more profit.
There have been numerous notable cases involving transfer pricing. In 2006 one of the biggest pharmaceutical companies in the world, GlaxoSmithKline (GSK), a UK based company, publicly announced that it would pay $3.4 billion to the IRS. The money was due the IRS as part of a settlement for a 17 year old transfer pricing scandal. The IRS claimed that GSK routinely shuffled money from its U.S. branch to its UK branch in order to dodge taxes. In a similar case in 2006, Merck was slapped with 4 tax disputes in both the U.S. and Canada. The potential penalties were up to $5.6 billion. One of the strategies Merck used was to use a subsidiary located in Bermuda. The company shifted the ownership of powerful patents to that subsidiary, then the main company “paid dues” to the Bermuda subsidiary for the right to use the patents. In another similar case in 2007, Pfizer intentionally set up poor results at its Pakistan subsidiary in an attempt to weaken the minority shares of stock even further. The initial court ruling deemed the company’s practices oppressive and the case was ruled in favor of the plaintiffs. The plaintiffs were minority stakeholders who wished to hold onto their stock even in the midst of Pfizer’s plot to drive out the small guys and gain a complete monopoly of its own stock. Pfizer attempted this by selling materials to the subsidiary at absurdly inflated prices, at times 70 times the competitor’s price. Pfizer eventually lost the case and paid an undisclosed amount to the plaintiffs.