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.
Tax Burden
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.
International harmonization
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).
Tax Treaty
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.
Organizational Considerations
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.
Funding Decisions
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.
Tax Factor
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.
Factor Tariff
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.
Competitiveness Factors
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.
Environmental Risk
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.
H.
Future
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.
Referensi:
- 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.
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