A. Early Concept
The complexity of the laws and rules that determine the tax for foreign companies and the profits generated abroad actually derived from some basic concepts. This concept includes the term neutrality taxes and equity taxes. Tax neutrality means that the tax has no effect (or neutral) of the resource allocation decisions. In other words, a business decision driven by economic fundamentals, such as rate of return, rather than tax considerations. Such decisions should produce an optimal allocation of resources. If taxes affect the allocation of resources, the results may not be optimal. However, in reality, taxes are rarely neutral.
Tax equity means that taxpayers face similar situations should pay similar taxes the same, but there is disagreement antarbagaimana interpret this concept. For example, if the foreign subsidiary is only by chance that domestic companies operating abroad? If so, then the income derived from foreign and domestic rates should be taxed to the parent company of the same State.
B. Diversity of the National Tax System
A company can do business internationally by exporting goods and services or to make foreign investments, directly or indirectly. Rarely lead to potential export taxes in the importing country, it is difficult for importing countries to set a tax on foreign exporters. On the other hand, a company that operates in other countries through subsidiaries or affiliated companies is taxable in that country. Effective management of the potential of this tax requires an understanding of the national tax system, which is very different from one State to another State. These differences include the types of taxes and the tax burden to the differences in reporting and the philosophy of taxation.
Types of Tax
Perusahaan yang beroperasi di luar negeri menghadapi berbagai jenis pajak. Direct taxes, like income tax, is easy to recognize and generally disclosed in the financial statements of the company. The other, namely indirect taxes such as consumption tax, can not be identified clearly and not too often disclosed. Generally, they are hidden in the heading 'fees and other expenses. "
Corporate income tax may be used more widely to generate revenue for the government compared with other major taxes, with the possible exception of customs and excise. However, since the mid-1980s, there is a trend internationally to lower income tax rates. That encourage this trend is the recognition that a reduction in tax rates would increase the global competitiveness of companies in the country and will create an attractive environment for international business. Indeed, the integration of world economy and the increasing ability of businesses to move from an environment with a high tax to low tax environment will limit the ability of a State to impose higher taxes than other countries.
Tax levy is the tax imposed by the government of dividends, interest and royalty payments received by foreign investors. For example, suppose a State levies a tax of 10% on interest paid by bonds. If the tax is levied on interest income from abroad, the tax is generally withheld by the company paying the interest from the source, which then pays the levy to the tax collector in the country of origin. Because the tax levy may hamper long-term capital flows in international investment, tax often is modified through bilateral tax treaty.
Value added tax is a consumption tax that is found in Europe and Canada. The tax is generally imposed on the value added of each stage of production or distribution. This tax applies to total sales minus purchases of intermediate unit seller. So, if a trader bought merchandise from the Norwegian krone 500 000 worth of a wholesale company of Norway, and then the item is sold with a value of 600 000 krone, the value added is at 100,000 krone and taxes levied on this amount. Companies that pay this tax before the fee can file a claim with the tax authorities. In the end consumers who bear the entire cost of value added tax.
Border taxes, such as customs and import duties, are generally intended to ensure that domestic goods can compete in price with imported goods. Thus, the tax imposed on imports is generally performed in parallel, and other indirect taxes paid by domestic manufacturers of similar goods.
Transfer tax the other indirect taxes. The tax is imposed on transfers (transfer) tax antarpembayar objects and can cause a critical influence on business decisions such as the structure of the acquisition. For example, the acquisition of businesses in Europe is often done through the purchase of shares, rather than purchasing the underlying net assets. Many more structures this difference is found in the acquisitions made in the U.S. because the transfer tax does not really matter there.
Difference in the overall tax burden is something that is important in international business. Various rates of income tax payers is an important source of this difference. Many other considerations that can significantly affect effective tax burden for multinational companies. National differences in the definition of taxable income is also important.
Suppose depreciation. In theory, most of the cost of the asset is said to be obsolete if the assets are used up to produce income. In order to comply with the principle kesetandingan, which expires this cost is recognized as an expense and deducted from income-related. If the assets are consumed equally in each reporting period, an equivalent portion of the cost is generally charged in each period for external financial reporting purposes. However, in the United States there is a distinction commonly made between depreciation for external reporting and depreciation for tax purposes. As an incentive to invest in capital assets, including commercial buildings, companies in the United States are allowed to use accelerated depreciation methods. In Germany, tax law and the determination of the building depreciation rate depreciated by the straight line. In Latin American countries which have a high rate of inflation (such as Mexico and Uruguay), companies are required to adjust their assets for the change of the price level and higher depreciation deductible for tax purposes. Finally, in Japan, a company can make the excess depreciation (depreciation on top of which is usually carried out on assets which can be depreciated) over assets that are considered vital to national interests. Examples are the pollution control equipment and assets that are aimed at creating alternative energy sources.
Other items which recorded the source of the differences between countries in the effective tax burden of social overhead associated with the host country. To attract foreign investment, countries less advanced industry often charge lower corporate taxes than the advanced industrial countries. However, countries with low direct taxes requires funds to finance the government and other social services as well as other countries. Therefore, direct corporate tax rates are generally lower indirect taxes generate higher or fewer public services and lower quality. Indirect taxes reduce the purchasing power in local markets. Fewer public services and low quality can cause a higher cost structure of multinational operations. Examples include poor transportation network, inadequate postal services, telephone systems, and telecommunications ineffective and lack of electricity.
As more and more companies are reducing the marginal corporate tax rates, many countries are expanding the tax base of the company. In the real world, the effective tax rate is rarely the same as the nominal tax rate. Thus, it is not appropriate to base the comparison between countries on tax rates must be. Moreover, a low tax rate does not necessarily mean a lower tax burden. Internationally, the tax burden must always be determined by observing the effective tax rate.
Tax Administration System
Determination of national tax systems also affect the relative tax burden. Some of the major systems currently used. For simplicity, we only consider the system classical and integrated.
Based on the classical system, corporate income tax imposed on taxable income at the corporate level and shareholder level. Shareholders are taxed at the corporate profits paid out as dividends or when they withdraw their investment. When a company is taxed on his earnings as measured prior to the payment of dividends, and then shareholders are taxed on dividends they receive, then the stock holdings of dividend income is effectively taxed twice.
Countries associated with this system are Belgium, Luxembourg, the Netherlands, and Sweden. The latest trend in developed countries has shifted from double taxation on dividend income by adopting the system either integrated or imputation system.
Based on the integrated system, corporate tax and shareholder integrated in such a way as to reduce or eliminate double taxation on corporate earnings. Tax credit or system imputation is a kind of common, integrated tax system. Under this system, the tax levied on corporate income, but most of the taxes paid can be treated as a credit against personal income tax if the dividends distributed to shareholders. Tax system is supported by the European Union and is found in Australia, Canada, Mexico, and many European countries, like France, Italy, and England.
System separation rates an integrated tax system type to another, where a lower tax levied on distributed profits (ie dividends) and not on retained earnings. German first using the system of separation rates. Another way to reduce the double taxation of dividends is to exclude a certain percentage of personal taxation, as was done in Germany now, or by taxing dividend rates that are lower than private rates, as this hastily imposed in the United States.
State Tax Incentives
Countries that intend to accelerate economic growth enough to realize the benefits of international business. Many states offer tax incentives to attract foreign investment. Incentives may include tax-free cash grants are used for the cost of fixed assets of new industrial processes or remission of taxes to pay for some period of time (tax holiday). Form of tax exemptions, while others such as the reduction in income tax rates, tax deferral, and the reduction or elimination of various types of indirect taxes. Most advanced industrial countries offer a number of targeted incentives, such as reducing corporate tax rates for manufacturing operations in Ireland (10%) by 2010. Some countries, especially those with few natural resources, offering tax reductions permanent. Countries that are called tax haven include:
1. Bahamas, Bermuda, and Cayman Islands, which has no tax at all.
2. Barbados, which has a very low tax rates.
3. Gibraltar, Hong Kong, and Panama, which impose taxes on profits generated locally, but excludes income from foreign sources.
Countries with special tax privileges may also be considered a tax haven in some ways limited. Countries with special tax privileges may also be considered a tax haven in some ways limited.
Harmful Tax Competition
Organisation for Economic and Development (Organization for Economic Cooperation and Development-OECD) tried to stop tax competition from a number of tax haven countries. Worldwide trend which led to the decline in corporate income tax rate is a direct impact tax competition. Thus, if tax competition is harmful? Actually, that tax competition would be beneficial if it can make government more efficient. On the other hand, the competition would be dangerous to divert tax revenue from the government that actually requires these revenues to provide services required by businesses. OECD is specifically concerned that the tax haven countries will allow businesses to avoid taxes or cheat other countries. Actually the so-called subsidiary brass plate does not have a real job-related: The company did not have activities that substantially and the only channel of financial transactions through a tax haven country to avoid taxes that other State. In particular, the OECD tax haven country that suspects are not willing to share information with tax authorities in other countries and implement or enforce the tax laws are not fair or in secret. Tax haven countries are under pressure to implement effective information exchange practices and transparency.
Consider the differences in tax systems across the world, global harmonization of tax policies can be quite useful. The European Union spends a lot of energy in this case because it is trying to create a single market. The introduction of the EU single currency, euro, showing the tax disparity between its members. Multinational companies, burdened by a national tax, also add to pressure on international tax reform.
C. Against Taxation of Foreign Source Income and Double Taxation
Each country claims the right to impose taxes on income generated within its borders. However, the national philosophy on the taxation of resources from abroad is different and this is important from the perspective of a tax planner. Some countries, like France, Costa Rica, Hong Kong, Panama, South Africa, Switzerland, and Venezuela apply the principle of taxation territorial and do not impose taxes on companies that are domiciled in the country that profits generated outside the State. This reflects the idea that the tax burden of foreign affiliates should be equal to its local rivals. In view of this, foreign affiliates of local companies is seen as a foreign company owned by a resident who happened to be local.
Most countries (including Australia, Brazil, China, Czech Republic, Germany, Japan, Mexico, Netherlands, United Kingdom, and United States) to apply the principle around the world and impose taxes on income or corporate and citizens in it, without a look at the territory. The underlying idea is that a foreign subsidiary of a local company is a local company that happens to operate overseas.
Foreign Tax Credit
Based on the principle of worldwide taxation, foreign earned income of a domestic company is taxable in full fine imposed in the host country or country of origin. To avoid the reluctance of businesses to expand abroad and to maintain the concept of neutrality abroad, the domicile of the parent company (State of domicile) may elect to treat the foreign taxes paid as a credit against the parent company's domestic tax liability or deduction as a deduction from taxable income. Companies generally prefer a tax credit, because it would result in a reduction in one by one on the domestic tax liability (limited to the amount of income tax actually paid), while the reduction in taxable income only for the foreign tax burden is then multiplied by the domestic marginal tax rate.
Foreign tax credit can be counted as a direct credit on income tax paid on earnings branch or subsidiary and any tax withheld at source, such as dividends, interest, and royalties are sent back to domestic investors. The tax credit can also be estimated if the amount of foreign income tax paid is not too obvious (ie when the foreign subsidiary sent most profits come from overseas to domestic parent companies). Here, the dividends are reported in the parent company's tax return must be calculated to cover the amount of gross income (which is considered paid) plus all foreign levies taxes applicable. This means that as if the parent company receives dividends domestically which includes taxes owed to foreign governments and then pay the tax.
Indirect tax credit allowed foreign (foreign income taxes deemed paid) is determined as follows:
Payment of dividends (including all tax levies) x creditable foreign taxes
Profit after tax foreign income
Tax Credit Restrictions
Country of origin may impose foreign tax sources in various ways. A State may choose to impose a tax on profits from national sources are separate. On the other hand, all sources of foreign income from any source of foreign incorporated and taxed only once. Some countries impose a tax on foreign source income based on the origin of the source with a tax credit to the source of the maximum amount of tax-related domestic tax that may be imposed on the profits.
To prevent foreign tax credit can eliminate the tax on domestic income, many countries set a general limit on the amount of foreign tax can be credited each year. For example, the United States to limit the tax credit on the proportion of U.S. tax that equates the ratio of foreign source taxable income of the taxpayer for the taxable income in the world during that year.
Foreign tax credit limitation applies separately to U.S. tax on foreign source income tax for each of the following types of income (or in groups):
· Passive income (eg, income from investments)
· Revenues of financial services
· Levy a high tax revenues
· Revenue of transport
· Dividends from each of the foreign company with a share of ownership by 10 to 50%
Foreign source taxable income is foreign source gross income minus expenses, losses, and reductions allocated to foreign source income, coupled with the front, losses, and reductions in certain levels that can not be allocated with certainty to the postal or any group in gross profit. The interpretation of this provision is reported as one of the major sources of tax payments and disputes between the U.S. IRS (Internal Revenue Service-IRS).
Although the foreign tax credit to protect the sources of foreign tax of double taxation (in some cases), tax treaties can do more than that. The signing of the agreement generally agree how taxes and tax incentives will be subject to, respected, shared, or else written off against revenues generated by citizens of another country in a tax jurisdiction. Thus, most tax treaties between countries of origin and host countries allow income generated by domestic firms in host countries will be exposed to tax if the company's country of origin remains the permanent standing there. Agreement also affect the tax levy taxes on dividends, interest and royalties paid by companies in the country to foreign shareholders. These agreements typically provide a reciprocal reduction of tax on dividend payments and often exclude royalties and interest from tax levies.
Consideration of Foreign Currencies
Tax Reform Act of 1986 introduced formal rules regarding taxation of gain or loss on foreign currency in the United States. In accordance with SFAS No. 52, all tax determination must be made based on the taxpayer's functional currency. Assumed functional currency is U.S. dollars unless overseas operations is an autonomous unit or qualified business unit. In general, the tax rules are similar, but not always identical, with accounting principles generally accepted. The following is an example of its tax treatment.
Gain or loss transactions in currencies other than the functional currency is generally recorded at the point of view of the two transactions. Under this approach, any gain or loss on transactions that qualify as hedges of foreign currency transactions in particular can be integrated with the underlying transaction. For example, gains or losses from forward exchange contracts are designated as effective hedges for loans in foreign currencies will offset the transaction gains or losses arising from the underlying obligation.
Gains or losses in foreign currencies that are generally allocated between U.S. sources and foreign sources with reference to the domicile of the taxpayer in its accounting books reflect the assets or liabilities denominated in foreign currencies. Thus, for a U.S. company, is a source of profit or loss in the United States.
Taxable income for foreign branches was originally based on the functional currency of each. Functional currency is then converted into U.S. dollars using the exchange rate weighted average during the taxable period. Foreign income tax paid and then translated by the exchange rate prevailing during the taxable period. Foreign income tax paid and then translated by the exchange rate prevailing at the time the tax is paid and then added to taxable income computed abroad or dirty. Foreign tax paid and claimed as a foreign tax credit for U.S. tax purposes.
For foreign subsidiaries, distributions made in accordance with Subsection F of regulation and then translated using the exchange rate weighted average applicable for taxable years of such foreign company. Foreign taxes deemed paid and then translated into U.S. dollars using exchange rates prevailing at the date of payment of taxes.
D. Dimensions Tax Planning
In tax planning, multinational companies have certain advantages over a purely domestic firm because it has greater flexibility in determining the geographic location of production and distribution system. This flexibility provides the opportunity to utilize their own national tax antaryurisdiksi differences so as to lower the overall corporate tax burden. Shift the burden and revenue through the company's bonds also provide additional opportunities for MNCs to minimize global tax paid. In response to this, national governments continue to design legal rules to minimize the opportunities for arbitrage that involves several different national tax jurisdictions.
Observations on the issue of tax planning starts with two basic things:
· Tax considerations should never have control of their business strategy.
· Changes in tax laws are constantly limit the benefits of tax planning in the long run.
The wearing of foreign tax sources, many tax authorities are focusing on the organizational form of foreign operations. A branch is generally regarded as an extension of the parent company. Thus, the returns immediately consolidated with the parent company's profit (an option not available to the subsidiary) and fully taxed in the year when income is generated, regardless of whether sent back to the parent company or not. Earnings of foreign subsidiaries are generally not taxed until done repatriation. Exceptions to this general rule are described as follows.
If the overseas operations initially predicted to cause harm, it may be advantageous if the taxes are organized in a branch at an early stage. Once a foreign operation is profitable, it will be more interesting to operate as a subsidiary. For one thing, the parent company overhead can not be allocated as a branch, because the branch is seen as part of the parent company. Moreover, if the tax on foreign income is lower than the host country rather than profit in the parent company's country of origin, the return on the subsidiary is not taxed by the State of origin of the parent company to do the repatriation. If the subsidiary is organized in a tax haven country that does not tax at all, then the tax deferral will increasingly look attractive. The national government knows this phenomenon and many have taken steps to minimize the abuse by the company. One is the treatment Headline Earnings F in the United States.
Controlled foreign companies and Profit Subdivision F
Earnings of foreign subsidiaries is not taxable to the parent company until it is repatriated as dividend income, known as the principle of the suspension. Tax haven countries provide opportunities to multinational corporations to avoid repatriation taxes and the State of origin by placing the transaction and the accumulation of profit in subsidiaries "name plate". This transaction does not have a real job or a related form. Profits generated from this transaction are passive and active.
United States to close the hole this weakness with a Controlled Foreign Company (CFC-Controlled Foreign Corporation) and Profit Provision Subdivision F. CFC is a company owned directly or indirectly by a U.S. shareholder (company, citizen or U.S. resident) of over 50% of the total voting rights or fair market value. Only shareholders who own more than 10% of the voting rights are counted in determining the 50% provision. CFC shareholders are taxed on the income of certain CFCs (the so-called Tainted Earnings-Related Income) even before the earnings were distributed.
Profit Subdivision F includes several sales and services revenue associated with the special. For example, if a U.S. subsidiary in the Bahamas to purchase supplies from the parent company that supplies the U.S. and exporting to the EU, then the profits recorded by the subsidiary in the Bahamas was the profit Subdivision F. On the other hand, if the subsidiary in the Bahamas to sell stock that was imported in the Bahamas alone, the profits from local sales is not a profit Subdivision F. Profit Subsection F also includes passive income such as dividends, interest, rents, royalties, and net gains from transactions in commodities or foreign currencies; profits from the sale of investment property such as securities; shipping income derived from the use of cargo ships or aircraft in trade foreign income and certain types of insurance.
Parent Company Abroad
In some circumstances, a multinational holding company based in the U.S. with operations in several foreign countries may have an advantage if it has a variety of foreign investment through a holding company in a third country. The general nature of this structure is the U.S. holding company directly owning shares of a holding company incorporated in a foreign jurisdiction and the parent company founded in turn has shares of one or more operating subsidiaries established in other parts of the country. The advantage of holding company form of organization is related to the tax include:
1. Maintaining the benefits of the tax rate levies on dividends, interest, royalties, and other similar payments.
2. Defer U.S. taxes on overseas profits until those profits repatriated to the U.S. parent company (ie to reinvest these earnings outside the country).
3. Defer U.S. taxes on gains from the sale of shares of subsidiaries operating overseas.
To realize these benefits will depend mainly on proper planning by the U.S. tax rules are complicated (such as Subdivision F and foreign tax credit rules) and avoid the use of anti-treaty rules which are found in a number of tax treaties.
Overseas Sales Company
Choice of organizational forms of foreign operations are also affected by state incentives designed to encourage some kind of specific activities that are considered beneficial to the national economy. For example, the United States has created a Foreign Sales Company (Foreign Sales Corporations-FSC) to promote exports and improve the U.S. balance of payments position continued to deteriorate. Under the FSC provisions, the vast profits of U.S. exports by FASC exempt from U.S. income tax. For example, suppose Parent Corp. in the United States to contract with a buyer in Europe to make delivery of supplies. Parent Corp immediately send the product directly from the factory in Oklahoma to European buyers, but also to sell the goods on paper to a company wholly owned affiliates, the Virgin Islands FSC later complete this transaction through the sale on the paper the other European buyers. Payments are made through the Virgin Islands FSC, which is then forwarded to the Parent Corp. to 30% of the FSC export income from trade are not subject to U.S. corporate taxes and no dividends are taxed if the FSC Virgin Islands Corp. to pay dividends to the Parent.
In 2000, the World Trade Organization (WTO-World Trade Organization) provides that the FSC subsidies are illegal and ordered the U.S. to change the FSC provisions. In response, the United States change the FSC, but replace it with the exception of profits derived from outside the territorial (extrateritorial income exclusion). The new law provides relief to the company from having to set up a separate company to record export sales, but still the tax cuts are almost as big as set out in the newly amended rules of FSC. The new law is well established as illegal by the WTO, but at the time of this writing, the United States still file an appeal.
The means used to fund overseas operations can be influenced by tax factors. Assuming this does not change, the possibility for the reduced tax debt, which increases the return on equity after tax, will also increase the attractiveness of debt financing in countries with high taxes. If loans in local currency is limited by local governments that require minimum levels of equity withdrawal by the foreign parent company, the loan made by the parent companies of foreign capital to fund deposit will produce the same end, with a record of tax authorities in the State holding company allows a reduction in interest the tax.
In another example, a subsidiary to finance overseas domiciled in a country with low tax rates or tax haven countries can also be used as a means of funding. At one point, the U.S. company which intends to borrow funds in the Eurodollar market can not do that because it gets the restrictions of the U.S. government levies a tax on interest paid to foreign creditors. Then to lower funding costs, U.S. companies can establish subsidiaries to fund abroad in Netherland Antilles, a State which does not impose any tax on interest payments to its residents.
Affiliated companies overseas funding can also be used to divert profits from the state with high taxes that became the location of the parent company or affiliated company to a state with low tax jurisdiction where the affiliate companies that provide funding.
Merger Tax Credit
The combined profit of the many possible sources of excess credits generated from the state with high tax rates to reduce the income received from areas with low tax rates. Excess tax credits as an example can be extended for taxes paid related to the dividends distributed by foreign companies second and third tier in a multinational network. This treatment allows the United States provided an indirect ownership by the parent U.S. company in the company of more than 5%. Planning ahead to take advantage of such credits would result in substantial tax benefits.
Allocation of Cost Accounting
Internal cost allocation between the companies was another means to shift profits from countries with high taxes to the State with low taxes. The most common is the allocation of corporate overhead expenses to affiliates in countries with high taxes. The allocation of the burden of such services as human resources, technology and research and development will maximize the tax deduction for affiliated companies in countries with high taxes.
Location and Transfer Pricing
Location of production and distribution systems also offer tax advantages. Thus the final sale of goods or services can be channeled through affiliates located in jurisdictions that offer immunity or tax deferral. Other alternative, a manufacturing company in the country with high taxes can obtain the components of the affiliate companies located in countries with low taxes to minimize corporate tax for the business group as a whole. Necessary elements of the strategy is the price that is used to transfer goods or services between companies within the group. Profit for the company as a whole system can be improved by determining the transfer price is high for the components were shipped from subsidiaries in countries with relatively low tax rates and low transfer rates over-kompenen components were shipped from subsidiaries located in countries with a relatively high tax rates.
Transfer pricing has attracted worldwide attention. The importance of this issue is obvious when we recognize that transfer pricing (1) internationally performed on a relatively large scale when compared with domestic conditions, (2) is affected by more variable when compared with those found in a very domestic environment, (3) vary from one company to another, from one industry to another industry and one State to another State, and (4) influence social relations, economics, and politics in a multinational business entities, and sometimes the whole country. Transfer pricing is the most important international tax issue facing today's MNC.
Effect of transfer pricing between companies on international tax burden can not be observed separately; transfer pricing can distort some parts of the system of planning and control of multinational corporations. Transactions between countries open up to a series of multinational strategic concerns ranging from environmental risks to global competitiveness. These concerns often affect the tax factor.
E. International Transfer Pricing Complex Variables
Needs to occur if the transfer pricing of goods and services exchanged between organizational units within the same company. For example, the need arises if one subsidiary company to send supplies to other subsidiaries, or if the parent company to carry the burden of administration and management fees, royalties for intangible right or interest on the finance company to a subsidiary. Transfer rates to put a monetary value on inter-firm exchanges that occur between the operating unit and is a substitute for market prices. In general, the transfer price is recorded as revenue by one unit and the unit cost by others.
Transfer pricing is anything new lately arise. Transfer pricing in the United States evolved along with the decentralization movement that influenced many American businesses during the first half of the 20th century. Once the company expands internationally, the problem of transfer pricing is also expanding rapidly. Cross-border transactions of multinational corporations are also open to a number of environmental influences that created the same time destroying the opportunity to increase profits through transfer pricing. A number of variables such as taxes, tariffs, competition, inflation, currency values, limitations on the transfer of funds, political risk, and the interests of joint venture partners are very complicated transfer pricing decisions. Based on these issues, transfer pricing decisions generally cover a lot of removal, which often can not be predicted or calculated.
Unless canceled by the law, corporate profits can be improved by determining transfer prices to shift income from subsidiaries located in countries with high tax rates for subsidiaries that are domiciled in countries with low tax rates.
In the United States, Section 482 of Income Tax Act authorizes the Minister of Finance to prevent the shifting of income or tax reductions related antarpembayar to exploit differences in national tax rates. Section 482 states that:
If there are two or more organizations, merchants, or businesses (whether incorporated or not, which was established in the United States or not and whether or not the affiliate company) owned or controlled directly or indirectly by the same interested parties, the Minister financial or official representative can distribute, divide, or allocate gross income, deduction, credit, or allowance of organizations, merchants, or businesses if it determines that the distribution, assignment, or allocation is necessary in order to prevent tax evasion or for reflect profit organizations, traders, or those businesses clearly.
Article 482 basically determines that the transfer between companies based on transaction prices reasonable. Reasonable transaction price is the price to be received by parties unrelated to special items the same or similar in the exact same situation or similar. Reasonable method of determining the transaction price that is acceptable (1) the method of determining the comparable uncontrolled price, (2) determining the resale price method, (3) cost-plus pricing method, and (4) other methods of assessment rates. A very heavy penalty imposed on an error in judgment related to the adjustment of Article 482. It could be an additional penalty tax of up to 40% of profit arising from the adjustment.
Consensus emerged among governments regard the determination of reasonable transaction price as the appropriate standard in computing income for tax purposes. However, some States differ in how the transfer pricing is reasonable is interpreted and implemented. As a result, this concept is a concept that is still not standard internationally. Multinational companies often "caught in the middle" when the tax authorities of different jurisdictions do not agree on transfer pricing, and each one tries to maintain a "fair share" of taxes from multinational companies. The controversy arises it will be time consuming and very expensive to resolve. The method is applied to monitor transfer pricing policies of multinational companies also vary around the world. Reported a lower likelihood of multinational companies transfer pricing audit in Ireland, Japan, Mexico, and South Korea, but likely high in France, Germany, the Netherlands and the United States. However, tax authorities around the world are meyusun transfer pricing rules and implement the new enforcement efforts. In 1992, only two countries (Australia and the United States) has a regulation requiring multinationals to transfer pricing policy document is retrieved. In 2003, 27 states already have such a rule. If in the past many multinational companies simply assign the determination haarga transfer, this time they must establish, document and explain the basic or risk severe penalties due to noncompliance. Thus, transfer pricing has become an enormous burden of compliance.
Transfer pricing scheme designed to minimize the global tax system often distorts the control of multinational corporations. If any subsidiary is evaluated as a separate profit centers, transfer pricing policies can produce a misleading measure of performance, which generally lead to conflict between subsidiaries and corporate goals. In the previous example, Blue Jeans, the U.S. reported lower profits compared with its affiliated companies in Hong Kong, although the U.S. subsidiary management more productive and more efficient than management in Hong Kong.
Tariffs for imported goods also affect transfer pricing policies of multinational corporations. For example, a company that exports to subsidiaries domiciled in countries with high rates can be reduced by lowering the tariff price of merchandise is shipped.
In addition to the balance that is identified, multinational companies must weigh the costs and benefits, both external and internal. Externally, an MNC must face three competing tax authorities in the importing country customs officials and tax administrators exporting and importing countries. High tax rates paid by the importer will generate the income tax base is lower. Internally, companies must evaluate the benefits of the low (high) income tax in the State of import duty compared to higher (lower), as well as the potential income tax is higher (lower) paid by the company in the State of export.
To facilitate the establishment of overseas subsidiaries, the parent company can supply the raw materials that are billed to the subsidiary with a very low price. Price subsidies can be phased out along with the strengthening position of foreign affiliates in overseas markets. Similarly, a lower transfer price can be used to protect the ongoing operation of the influence of foreign competition increasing in the local market or other markets. Indirect influence of competition can also be made possible. To improve access for foreign firms to local capital markets, lower transfer pricing for their raw material inputs and a high transfer prices for output to increase reported earnings and financial position. Sometimes, transfer pricing can be used to weaken the company's competitors.
Such competitiveness considerations must be balanced against the many losses that the opposite effect. Transfer rates for competitive reasons may invite anti-trust action by the government of the host country or retaliation by local competitors. Internally, the price subsidy is actually only a limited impact to enhance the competitive way of thinking in the minds of managers whose companies benefit from this subsidy. What was originally a temporary relief can easily become a permanent management support.
If the foreign competitiveness factors can guarantee low transfer rates and is charged to foreign subsidiaries, the risk of very high inflation rates could lead to the opposite. Inflation reduces the purchasing power of cash owned by the company. High transfer prices for goods or services provided to children who face high inflation firms may divert cash in a very large number of subsidiaries.
Balance of payments problems (associated with inflation) to encourage local governments to devalue the currency, foreign exchange control set, and or apply restrictions to repatriate earnings from foreign-owned companies. Potential losses arising from the risk of facing currency devaluation can be avoided by diverting funds to the parent companies (affiliated companies related) using transfer prices which have been adjusted for inflation. Through the control of foreign exchange (ie the government limits the amount of foreign exchange available to import certain goods), which reduced the transfer price of imported goods will lead to affiliated companies that are affected by the control that has the desire to import more. To overcome the limitations of this repatriation, high transfer rates lead to a large amount of cash returned to the parent company each time a company sells products or services to foreign subsidiaries.
Performance Evaluation Factors
Transfer pricing policy is also influenced by their influence on behavior management and is often the main determinant of company performance. For example, if the mission of a foreign affiliate is to provide equipment for the entire enterprise system, then the appropriate transfer price will allow the management company to provide a stable stream of income to affiliates that can be used in the comparison of performance. However, it will be difficult for a decentralized company to determine transfer prices between companies that will (1) motivate managers to make decisions that will maximize their profits and units that align with overall corporate objectives, as well as (2) provide the same basis when assessing the performance of managers and corporate units. If a subsidiary is free to negotiate a transfer price, the managers may not be able to resolve conflicts that arise between what is best for the child and what is the best company untu overall company. Therefore, the influence of the management of the subsidiary would be very bad if the company headquarters to impose transfer pricing and procurement alternative that looks done in an arbitrary or unreasonable. Moreover, a growing number of decisions made by corporate headquarters, it will be even less favorable to profit centers that are decentralized, because the local managers would feel the loss of incentive to act for the benefit of local operations are managed.
Accounting for contributions
The management accountant can play a significant role in calculating the balance (trade-offs) in transfer pricing strategies. The challenge is to maintain a global perspective when mapping the benefits and costs associated with pricing decisions. The effect of this decision to the company's overall system must be seen first.
Calculate the amount of this balance is difficult given the influence of the environment should be considered in units of the group, and not their own. For example, suppose the difficulty in calculating the balance of influence transfer pricing policies for the subsidiaries located in countries with high income tax rates, high import tariffs, price controls, capital markets are very small, very high inflation, control over to foreign exchange and government instability. Transfer pricing of goods and services charged to the child's high corporate income tax will reduce the company and move the child to the parent company's excess cash. However, high transfer rates will result in higher import duties, thus disturbing the competitive position of subsidiaries (resulting from higher prices entered), exacerbating the rate of inflation, increased cost of capital and its subsidiaries will even lead to retaliatory action by the State Government host to protect the balance of payments position. And a further complicate matters, all these variables change constantly. One thing is clear: superficial calculations for determining the influence of transfer pricing policies of individual units within a multinational enterprise system is not acceptable.
F. Transfer Pricing Methodology
In a world with a highly competitive market, there will be a big deal when they wanted to transfer pricing resources and services between companies. Transfer pricing can be based on the difference in cost increases or market price. Both of these systems actually do not contradict each other. However, there is rarely a competitive external market for products that are transferred antarentitas the associated special.
Price versus cost versus ....?
The use of market-oriented transfer pricing has several advantages. Using the market price of the opportunity costs incurred by an entity that does not make the transfer as a sale to external markets, and use of this method will encourage the use of scarce corporate resources efficiently. Its use is also said to be consistent with the orientation of decentralized profit centers. The market price is also helpful in distinguishing the operating units are profitable and which are not profitable and easier to put to the tax authorities as a fair transaction price.
Advantage of market-based transfer price should really be considered to see its shortcomings. One is the use of market prices do not provide enough space for companies to make price adjustments in a competitive or strategic objectives. A more fundamental problem is that often there is no intermediary market for a product or service in question. Multinational companies conduct transactions not involving independent companies, such as a highly valuable technology transfer kept confidential to an affiliated company. Relationships between firms affiliated transactions under the same control often differ significantly and fundamentally, when compared to similar transactions conducted between the parties unrelated special.
Cost-based transfer pricing system can cope with most of these shortcomings. Besides this system (1) simple to use, (2) based on data readily available, (3) easy to explain to the tax authorities, (4) is a routine thing to do, so as to avoid occurrence of internal friction that often occurs when arbitrary system used.
Of course, the system cost-based transfer pricing is not without its drawbacks. For example, sales of goods or services based on the actual cost will only give a little incentive for the retailer to control costs. Production inefficiency will simply be charged to buyers through higher prices. Cost-based system relying too much on historical costs, which ignores the relationship of demand and supply on a competitive basis, and does not allocate costs to products or services in a way satisfactory. Problem of determining these costs are felt in the international level, because the concept of cost accounting is different from one State to another State.
Principle of Fair
A common type of multinational companies is the integration operation: Its subsidiaries are in the same control as well as a variety of sources and the same purpose. The need to declare taxable income in different countries means that multinational companies must allocate income and expenses among subsidiaries and determining transfer prices for transactions between companies.
Tax authorities around the world have developed rules of transfer pricing and income allocation is quite complicated as part of the national income tax system of each country. Mostly based on the principle of fair (arm's-length principle), the transfer pricing of transactions between firms by assuming that occur between parties who are not related special in a competitive market. OECD identifies some broader method to ensure the price is reasonable. Similar to those provided for in section 482 Income Tax Act Undag in the U.S., this method is:
1. Controlled methods of Price Not Equal
Under this method, the transfer price is determined by reference to prices used in transactions between companies that are independent equivalent or between companies with unrelated third parties. This method is appropriate to use if the goods are available in sufficient quantities so that sales are controlled essentially comparable with the sale on the open market. Commodity-type product typically use this method for internal transactions.
2. Method of Controlled Transaction Not Equal
This method is applied to the transfer of intangible assets. This method identifies the level of royalty rates with reference to uncontrolled transaction in which the intangible assets of the same or similar transferable. As uncontrolled price method are equivalent, this method relies on a comparison of the market.
3. Method of Selling Price Return
This method of calculating reasonable transaction price that begins with the prices charged on the sale of goods referred to an independent buyer. Sufficient margin to cover expenses and normal profit is then deducted from the price for transfer pricing between companies. Decided that adequate margin is difficult if the buyer affiliated companies add considerable value to the goods transferred.
An achievable goal is to calculate the transfer price between the two units as distribution units cover all costs and normal profit. As will be seen, the resale price method is an approach to work backwards.
4. Method of Determining the Cost Plus
Determination of costs plus an approximation of future work in which an increase in the value added to the cost of affiliated companies that perform transfers in local currencies. Increase in value is generally include (1) assuming funding costs associated with export inventory, receivables, and assets used, and (2) the percentage of the cost of covering the cost of manufacturing, distribution, warehouse delivery of internal and other costs associated with export operations . Adjustments are often made to reflect government subsidies designed to make the manufacturing cost can be competitive in the international market place.
Transfer pricing method is particularly useful when the semi-finished goods transferred between companies overseas affiliates, or if an entity is a sub-contractor for other companies. The main problems include the calculation of measurement cost items are transferred and ensures the proper increase in value.
Plus the cost of transfer pricing is the price that allows the unit to transfer to obtain a certain percentage of compensation in the amount above its cost of production.
5. Comparable Profit Method
This method supports the general view which states that taxpayers are facing a similar situation should also get similar benefits for some period of time. Thus, the profit on the transaction between parties inter-related privilege should be compared with a profit on transactions with related parties that are not related to particular business involved in similar activities and similarly situated as well. Return for capital employed (return on capital employed, ROCE) is a major indicator of income level. Under this approach, the ratio of operating profit to average capital employed by an entity reference in comparison with the ROCE entity are discussed.
The application of these methods generally require the adjustment of the differences that exist between the parties being compared. Factors that require adjustment are different sales conditions, differences in the cost of capital, foreign exchange risk and other risks and differences in accounting measurement practices.
6. Separation Methods Profit
This method is used if the reference product or the market is not available. On this method include its market share in the profits generated through transactions with related parties special, which is between affiliated companies is based on a reasonable way. One type of approach, the comparable profits method of separation, dividing the profits resulting from transactions with parties related to the allocation of user privileges via a percentage of total income generated from similar types of transactions and activities conducted by firms that are not controlled.
More complicated methods, methods of separation of residual income, using a two-stage approach. First, the routine functions performed by the entity's parent company, affiliates and subsidiaries, provided the price at each stage of the production process by using the relevant reference. Any difference between the total local income generated by the combined company and that can be attributed to the functions that are routinely considered as residual income, which is basically a return of the functions that are not routine. This residual, which is similar to the intangible goodwill, and then separated based on the relative contribution of each party affiliation of intangible assets. This value can be determined by referring to fair market value or capitalization of development costs of intangible assets.
7. Other Pricing Methods
Due to the existing pricing methodology does not always reflect the underlying circumstances, additional methodologies may be used if it produces a more reasonable price measure accurately. According to the OECD:
It must be admitted that the price is reasonable in most cases will not be set correctly and that under such circumstances would be considered necessary to find a reasonable estimate of the approach. Often times, it is worthwhile to take into account more than one method to get an estimate of the fair price satisfactory having regard to the evidence available.
Section 482 Income Tax Act the United States to determine the best method rule requiring taxpayers to choose the method that best transfer pricing based on the facts and circumstances of a case. Argentina also has the best method rule. A number of other countries, such as the Czech Republic and Mexico, did not imply preference over transfer pricing method. However, most countries have rules on transfer pricing is more like a transaction-based method (the equivalent uncontrolled price, the equivalent uncontrolled transactions, the resale price and cost plus method) when compared to profit-based methods (comparable earnings and separation methods earnings). Countries include Belgium, France, Germany, Japan, Netherlands, and England. The OECD Guidelines provide that an adequate method to choose, and also prefer a transaction-based methods rather than profit-based methods.
Calculate the fair price is right and accurate is not always possible. Thus, documentation of transfer pricing is used, and reasons that may underlie an important thing. This is true regardless of the jurisdiction in which any tax and transfer pricing method is preferred. The following are the steps that help transfer pricing:
· Analyze the risks faced, the function being run by affiliate companies and the determinants that affect the economic and legal pricing.
· Identify and analyze the company and the transaction is used as reference. Document reasons made the adjustment.
· Compare the company's financial results that are comparable to the taxpayers.
· If there are comparable transactions, note the similarities and differences with the transactions undertaken by taxpayers.
· Document why the pricing method selected is the most appropriate and why other methods are not.
· Renew the information before making a tax return reporting.
Advanced Pricing Agreement
There is considerable concern over the transfer price can be received by the government. Recognizing that multinational firms can use transfer pricing to shift profits, and worry over economic and social consequences faced by the government increase oversight of multinational operations. At the same time, ambiguity and complexity of the rules determining transfer prices between firms causes the transaction is likely to be target of a tax audit. A survey of multinational companies have consistently shown that they assume that the transfer pricing as a matter of international perpajakkan the most important and that the face of an audit of transfer pricing in a country in this world is almost certain.
Advanced pricing agreement (APA advance-pricing agreements) is a mechanism used by multinational enterprises and tax authorities to voluntarily negotiate the transfer pricing methodology agreed upon and binding on both parties. This agreement reduces or eliminates the risk of transfer pricing audits, saving time and money for both multinationals and tax authorities. Introduced in the United States in 1991, APA has been widely accepted by another country. This agreement is binding for a fixed time period, say for 3 years in the United States.
G. Practice Transfer Price
Companies operating significantly different in many dimensions such as size, type of industry, nationality, organizational structure, the degree of international involvement, technology, products or services, and state competitiveness. Therefore, it is not too surprising that the various transfer pricing methods can be found in practice. Most of the empirical evidence of transfer pricing practices based on field surveys. Because the company's pricing policy is often regarded as something that must be done, then the survey should be interpreted with caution. Given the dramatic impact of globalization on business operations since the 1990's, we also have to be careful whether the transfer pricing survey before the 1990's are still valid today.
What are the factors that influence the selection of transfer pricing methods? What is the effect of transfer pricing to be considered in the planning process? A recent study put the question to financial executives of a number of U.S. multinationals to mention the three most important goals of international transfer pricing determination. Manage to dominate the tax burden other purposes, but the operational users such as transfer pricing to maintain the position of the company's competitiveness, promote equitable performance evaluation, and provide motivation to employees is also important. Managing inflation, managing foreign exchange risk and eliminate the restrictions on cash transfers is relatively unimportant.
Another study asked a similar question to the managers of multinational companies from 19 countries. Here, operational problems getting a slightly higher priority than tax issues. The study also found that the operational and tax effects of the new transfer pricing is often considered only after strategic decisions have been made. Only 30% of multinational companies that indicated that transfer pricing is part of the strategic planning process. Twenty-nine percent thought that the transfer pricing after the strategic decision was made and 37% see just transfer pricing tax compliance issues. Four percent did not believe that transfer pricing is a strategic decision at all. The results indicate that transfer pricing can play a more important role in the planning process of multinational companies. The study looked at:
Obviously, the "carriage tax" should not come before the "horse operations," but by looking at the level of taxation in the entire world, and far-reaching impact of transfer pricing operations, it is surprising to notice a number of companies that do not consider the initial cost of the business activities this strategic decision-making process ... is an act of transfer pricing compliance relative, and not a proactive mechanism to manage the company's effective tax rate decreased in the whole world.
Technology and the global economy pose challenges for many of the principles underlying the international perpajakkan. One principle is that every nation has the right to decide for itself how much tax can be collected from people and businesses that exist within its own territory. Tax law changes clearly identified, but the situation is even less precise. Trade electronically via the Internet ignores borders and physical location. Commercial events currently happening in cyberspace, on a server anywhere in the world.
The ability to collect taxes depending on how knowing who to pay, but with an increasingly complex encryption techniques, it is increasingly difficult to identify taxpayers. Money electronically without the owner is a reality. The Internet also makes a number of multinational companies had had to shift their activities to countries with lower taxes that may be very far from its customers, but as close as a mouse click to access. Then it becomes increasingly difficult to monitor and impose taxes on international transactions.
Governments around the world requires the transfer pricing method to the principle of a fair price. Namely, a multinational company in different countries are taxed as if they were independent companies that operate in fair each other. Complicated calculation of the fair price is no longer relevant today for the global company because of the fewer who operate this way.
What is the impact of these developments for international taxation? Whether the national tax in line with the global economy? This trend will continue. At the same time, many experts see a growing tax competition. Internet makes the effort to take advantage of a tax haven country more easily. Some parties supported a single tax as an alternative to the use the transfer price in determining taxable income. Under this approach, the total profits of multinational companies is allocated to each State based on a formula that reflects the company's relative economic presence in the country. Each State would then tax the most profit rates that are deemed appropriate. Clearly, future perpajakkan face many changes and challenges.
- Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 1, Edisi 5., Salemba Empat, Jakarta.
- Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 2, Edisi 5., Salemba Empat, Jakarta.