Transfer Pricing and Taxes for

Multinationals
Transfer Pricing and Taxes for
Multinationals
 Tax-Motivated Profit Shifting
• One way that companies respond to tax globally
• A multinational company (MNC) generates income across all of its
operations around the world
• The company is taxed on that income in each jurisdiction
• For example, a U.S. multinational may have operations in the U.S., Puerto
Rico, Hong Kong, India, Singapore, and Malaysia
• It is the best interest of the company to…
• Report more profits in low-tax jurisdictions and
• Report less profits in high tax jurisdictions
• How?
 Tax-Motivated Profit Shifting
• In lieu of tax incentives, MNCs should conduct transfer pricing under the
“arm’s-length” principle
• As if the transacting parties were unrelated
• Tax incentives motivate MNCs to deviate from the “arm’s-length” principle
• Using opportunistic transfer prices to “shift” income/profits
• Opportunistic: driven by the motivation to avoid taxes

• Microsoft U.S. after-tax Profit + Microsoft Ireland after-tax Profit =

Microsoft after-tax Profit (worldwide)
• U.S. corporate income tax rate = 21%; Ireland corporate income tax rate = 0%
• Report minimum profit in the US (e.g., $0)
• Report maximum profit in Ireland
https://www.propublica.org/article/the-irs-decided-to-get-tough-against-microsoft-microsoft-got-tougher
Microsoft’s Puerto Rico Deal
• Microsoft opened a manufacturing
facility in Puerto Rico in 1989.
• The factory had 85 employees
burning Windows software onto
CDs.
• In 2003, Glenn Cogswell, the head
of international tax, proposed a tax
plan that would “require very
aggressive tax structuring and
work.”
• KPMG made a persuasive pitch.
Microsoft’s Puerto Rico Deal

Tax Holiday 0%-2%

Microsoft Operations, (for 15 years) Secretary of
Puerto Rico State of
Factory + Jobs Puerto Rico
Microsoft’s Puerto Rico Deal

Microsoft Corporation & U.S. Retail

U.S. Affiliates Market
$

Puerto Rico Subsidiary

bought
IP Rights from
U.S. Parent for $31B

Tax Holiday 0%-2%

Microsoft Operations, (for 15 years) Secretary of
Puerto Rico State of
Factory + Jobs Puerto Rico
Microsoft’s Puerto Rico Deal

Microsoft Corporation & U.S. Retail

U.S. Affiliates Market
$

Puerto Rico Subsidiary U.S. Parent paid $69B of $39.5B taxed at

bought technology transfer price and 0%-2%
IP Rights from $1.5B of manufacturing cost (as opposed to
U.S. Parent for $31B 35% in the U.S.)

Tax Holiday 0%-2%

Microsoft Operations, (for 15 years) Secretary of
Puerto Rico State of
Factory + Jobs Puerto Rico