According to John McKinley and John Owsley (2013), transfer pricing refers to the price charged on goods and services offered between foreign corporations and their parent company during an intercompany transaction. Section 1504(b)(3) of the penal code maintains that transactions between the parent company and its foreign corporations should be excluded during the consolidation of monetary operations of domestic parents and their controlled foreign subsidiaries. Nonetheless, neither international corporations nor local parents are consolidated because of the purposes of tax; hence, their transactions are not eliminated (MCKINLEY & OWSLEY, 2013). The notion of intercompany pricing has a direct effect on the group-wide allocation of taxable income across international tax jurisdictions. Therefore, the policies that govern a country’s transfer-pricing may have direct effects on its after-tax revenue in case there are differences in tax rates between national jurisdictions.

The IRS derives its authority to regulate and modify taxable income in two related companies or organizations to reflect a more accurate image of the revenue that is generated by each firm from Section 482. Regs. Sec. 1.482-1(b) details that the standard procedure to be used in establishing the actual taxable income of a regulated taxpayer entails making the taxpayer deal with an unregulated taxpayer at an arm’s length (Devereux, 2015). According to this precision, the arm’s length standard is generally met by controlled transactions when the revenue from the trade is in tandem with the income that would otherwise be generated when unrelated taxpayers engage in a similar business transaction beneath related circumstances.

 The name of the company and the type of international business it is engaged in

According to The Guardian (2010), Unilever is an MNC which deal in consumer products which include but are not limited to personal care products, cleaning agents, beverages, and food. The company is a dual-listed organization which comprises of Unilever PLC established in London, and Unilever NV in Rotterdam (MCKINLEY & OWSLEY, 2013). The twin companies are the holding companies for over five hundred syndicates around the world, each of which deals in the manufacturing and distribution of foods, soaps and household products. The two companies have identical boards of directors in mutual agreements in equalizing of the firm’s shares, dividends, and membership on ordinary capital investment. Therefore, although the firms appear dual, they are per se unitary in operation.

 Projections of revenues, costs, and tax rates based on the company’s transaction in the two (2) countries researched and the U.S.

	Revenues	Costs	Tax Rates
United States	9,808,000	2,976	2,575,000
Nigeria	255,922	14,863	9,613
Brazil	5,953,563	1,374,463	1,183,374

The table above shows the projected costs allocations in the United States, Nigeria, and Brazil and their potential income and tax rates. However, the distribution of costs in the form of investments to the parent company and its branches in foreign countries by reference to their relative potential revenues is an inexact logic which can be evaluated for reasonableness over a given period. The table further shows that tax authorities in foreign corporations’ respective countries challenge and determine the amount of allocation under cost redistribution arrangements depending on the country’s tax authority. This is because taxation determines the amount of revenue that a given a cost-share will generate. 

Allocating revenues and costs to each country to determine the lowest possible overall tax for each country

The lowest possible total tax, otherwise referred to as effective tax rate is the standard or average rate of taxation that an individual or a corporation can pay. The sufficient fee payable by individuals or single business entities is the average amount which their earned revenue such as wages and salaries, and unearned revenue such as dividends is taxed (MCKINLEY & OWSLEY, 2013). The lowest possible overall tax is only applicable to domicile local and state income taxes as opposed to federal income taxes that MNC’s pay from the property, sales, and income taxes. Therefore, to determine the minimum possible charge for each country, I would add up the individual total tax burden for each foreign corporation and divide it by respective taxable income (KAGAN, 2019). The calculation is helpful because it will enable Unilever to determine and compare the lowest tax rates that international corporations may pay in taxes in their respective countries. Additionally, the smallest possible fee is an adequate representation of the foreign corporations’ overall tax liability because it is more often than not, lower than a company’s marginal tax rate.

A scenario that will result in a favorable tax position

Integration of global economies emasculates the efficiency of national and foreign corporate tax regimes. More often than not, international corporations shift the revenues and investments to countries where they are likely to pay lower tax by trying to use legal means to minimize what they pay. However, by so doing, Multinational Corporations risk jeopardizing their reputation, which is their most precious and delicate asset if they contradict their obligation to pay their fair share of tax. Unilever can establish and adopt a favorable tax position by creating a geographical and market concentration of its foreign corporations and parent company (Hungerford, 2014). The company can then demonstrate to the customers why it backs liberal obsession with the value of stakeholders instead of willingly paying high rates of tax. Additionally, Unilever needs to show a rational trust in free markets, give a particular focus shareholder value, as well as observing legal prerequisites in its jurisdictions that control the corporate leaders’ view of the legitimacy of MNCs.

 How the Internal Revenue Service (IRS) uses the Internal Revenue Code (IRC) section 482 to prevent shifting of profits to other countries to reduce U.S. tax liability

The United States has an elaborate framework of legal practices and policies which are designed to protect uphold and preserve her tax base. The laws, as outlined in section 482 functions by preventing shifting of income between parties involved in business via improper pricing of goods used in during the parties’ transactions (Rigos, 2017). The legislation is outlined in the IRC in the Federal Tax laws. Section 482 of the internal revenue code regulates the MNC’s transfer pricing and is applicable whenever two or more businesses, trades, or companies irrespective of their place and form of organization are run either indirectly or directly by same interests (KAGAN, 2019). The general principle of section 482 empowers the IRS to reallocate credits, deductions, allowances, or income between the members within controlled groups to facilitate and depict a clear reflection of revenue as well as to prevent avoidance of tax.

Besides, a United States-based controlled taxpayer whose tax liability is likely to be impacted by legal restrictions in the foreign country of the investment may choose the deferred income method which is a method of accounting that ensures transparency in the taxation process (Rigos, 2017). In this approach, the applicant takes a written statement together with a United States’ amended return that is filed before internal revenue service. The taxpayer then connects with any of the controlled group members regarding the scrutiny of the taxable income in the years for which the legal restrictions in the jurisdictions apply. Therefore, the internal revenue service uses written statements which are issued to taxpayers that in return, accustom them to coordinated examination programs for return amendment (MCKINLEY & OWSLEY, 2013). Reports which satisfy the prerequisites of a qualified U.S. income tax return for the sake of § 1.6664-2(c)(3) as per the commissioner or as established in the regulations can be commended by the applicable income procedures. Secondly, the IRS provides that the election statement must determine and indicate the relevant foreign legal laws, the parties to the transaction, and the operations that are affected.

A brief position in defense of the client to the IRS

As a CPA and a client’s advocate, the applicable standards expect of me to establish a minimum possible tax rate. It is, however, in the interest of my good faith to believe that controversial tax positions hold realistic chances of prevalence when their legitimacy is questionable before the IRS audit (Hungerford, 2014). Hence, attached herewith is my recommendation of an alternative tax position which I consider to have a reasonable basis of sustainability because it contains a satisfactory revelation of the situation. My view also teaches my client (Unilever) about the plausible penalties of the decision taken as well as any chances to evade the given punishments (Devereux, 2015). Although it is within my client’s jurisdiction to make the definitive decision, my position does not whatsoever exploit the selection process of the IRS or argue to win unwarranted negotiating leverage.

Tools IRS agents have available to perform the audit on multinational transfer pricing issues

Firstly, tax examiners use the information-gathering tool to collect information from foreign and local corporations. The information-gathering is a tool given to IRS in treaties to audit external parties whose parent company is based in the United States. Besides, tax examiners can liaise with a United States-based corporation to serve as a qualified agent on behalf of an organization that has at least twenty-five per cent of its shares in the U.S. Company (Larsen, Cordero, Bowen, Denault, & D’Alessandro, 2018). Principally, the United States-based firm serves as an agent for accepting IRS demands for documents and information from the parent company and foreign corporations as well as auditing summons. However, when the US-based firm refuses to act as an agent of the foreign parent, the internal revenue service may enforce substantial monetary charges on the U.S. firm and execute efficient transfer price according to the available information in IRS’s system.

Alternatively, the IRS agents can also issue an administrative summon in line with section 7602 of the revenue code, which requires the taxpayer to dissipate specific information. Under this tool, an IRS agent has the discretion to issue a designated order while auditing a foreign corporation or its parent company, which stops the operation of the statute (Rigos, 2017). The summons can also suspend the ruling of restriction during any legal enactment preceding that decree. Designated warrants are influential enforcement tools that Internal Revenue Service agents use to conduct the audit on Multinational transfer pricing issues.

References

Devereux, M. P. (2015, June 15). How should multinational companies be taxed? World Economic Forum.

Hungerford, T. L. (2014, March 31). The Simple Fix to the Problem of How to Tax Multinational Corporations — Ending Deferral. Economic Policy Institute.

Hustad, C., & Reams, K. (2016, March 22). Transfer pricing controversy and risk management. Euromoney Institutional Investor PLC.

KAGAN, J. (2019, March 12). Effective Tax Rate. Investopedia.

Larsen, P. O., Cordero, F., Bowen, M. J., Denault, A. M., & D’Alessandro, P. J. (2018, September 1). Transfer pricing in the United States: overview. Thomson Reuters Practical Law.

MCKINLEY, J., & OWSLEY, J. (2013). Transfer pricing and its effect on financial reporting. Journal of Accountancy , 54.

Rigos, J. J. (2017). Applying the AICPA’s Professional Standards to Tax Practice: Best Practices for Minimizing Risk and Penalties. The CPA Journal.