Second, the role of transfer pricing
1, tax evasion. Mainly refers to evading income tax and customs duties. There are many "TaxHeaven" in the world, named after its extremely low income tax. Multinational companies can buy at a low price and sell at a high price through subsidiaries located in tax havens. Although the goods and funds don't pass through tax havens, this turnover on the books makes it unprofitable for the seller's subsidiaries to sell at low prices and the buyer's subsidiaries to buy at high prices, while the subsidiaries located in tax havens realize mutual benefit and reduce the tax revenue of the head office. Another way to avoid income tax is to take advantage of the tax rate differences in different countries (regions). For example, when a country with high tax rate sells technology or services to a country with low tax rate, the transfer price is lowered to reduce the purchase cost of the country with low tax rate and improve its profit, and vice versa. In this way, profits are transferred from high-tax countries to low-tax countries, which reduces the tax revenue of the whole company. Moreover, because tariffs are ad valorem taxes, multinational companies can use subsidiaries of different countries (regions) to reduce the tax base and tax amount of imported subsidiaries and ad valorem import taxes at lower delivery prices when conducting transnational internal trade. At this point, it is not difficult to see that multinational companies use transfer pricing to avoid the impact of tariffs and income tax, which is just the opposite. If they pay less import tax, they can pay less income tax. Generally speaking, income tax is more important than import tax. Therefore, multinational companies usually give priority to income tax when weighing the pros and cons.
2. Avoid risks. The risks here include: (1) reducing or avoiding the risk of exchange rate changes. Since the financial crisis, the currency exchange rates of various countries have fluctuated greatly and frequently, which makes multinational companies face the transaction risk in trade and the foreign exchange risk of assets. Multinational companies generally adopt the method of currency transfer and the method of "making mistakes first and paying later" to prevent it, but transfer pricing can strengthen the effectiveness of this method and further reduce the risk.
(2) Avoid political risks. Multinational companies are worried about the confiscation or nationalization of the host government. Although multinational companies can take a series of measures, such as participating in the investment insurance plan of the government of the investment country, hiring local managers, and letting the host country own the company's equity. , will pass on some risks. However, in specific investment, multinational companies often use transfer pricing to impose higher sales prices on their subsidiaries, charge high service fees, and depress the export prices of their subsidiaries, which will make their subsidiaries fall into a state of financial deficit and become an empty shelf, thus transferring investment profits from the host country.
(3) deal with price control. In order to safeguard the legitimate rights and interests of the domestic market and local residents and protect national industries, the host country has formulated market price control policies. In order to avoid being accused of dumping in the host country, multinational companies use transfer pricing to raise costs and product prices. At the same time, in order to avoid the price control of the final product in the host country, multinational companies transfer the products or intermediate products that produce the products to their subsidiaries at high prices, resulting in high costs, higher product prices and high profits.
3. Allocate funds. The global operation of multinational companies needs to use a lot of funds to coordinate the amount of funds of all units in the whole company system, and hopes to recover their investment as soon as possible. However, many countries have implemented various controls with different limits. Therefore, transfer pricing is used to make subsidiaries pay high fees for the production, scientific research and management of the parent company, sell at high prices or buy at low prices, and withdraw capital from the subsidiaries. Similar practices include: transferring capital from low-interest countries to high-interest countries, or transferring the funds of subsidiaries in time when a foreign company has a good opportunity to expand its investment.
4. gain a competitive advantage. Transfer pricing is a magic weapon for multinational companies to gain competitive advantage. When multinational companies set up new subsidiaries overseas, they can use the capital power of the whole company system to provide low-cost raw materials, products and services for the new subsidiaries, and buy their products at high prices to help the subsidiaries quickly open up the situation, establish a good reputation and gain a firm foothold. When the overseas market competition of a multinational company is extremely fierce, the head office will transfer at a low price, maintain low-price dumping at all costs, and concentrate financial and material resources to support the subsidiaries that develop markets there until they crush their competitors and finally occupy the market. 5. Reduce the troubles caused by high profits. When a multinational company enters a new market, it will inevitably attract the attention of its peers. Its failure is a warning, but its success is a silent horn, attracting competitors to "grab the beach" and easily leading to re-division of the market.