I've been planning on doing an R1 for a while, but since my knowledge is limited to either international trade, of which we've been R1ed to death, or international tax, of which not too much badecon shows up around here, I haven't been able to show of that grad degree.

Thanks for /u/emptyheady for pointing out this marvelous piece in the silver thread. Let me preface that for exchange of money in my bank account I actually help MNCs avoid/evade/escape/butcher/Enron their corporate tax as a transfer pricing economist and whatever this Undercurrent guy is trying to tell is right up my alley.

I don't want to focus too much on the political aspect of this video, since that is a very gray and subjective area in international tax. However, I do like apples over pears.

The beginning of this video isn't too interesting, although I don't have a clue what artisanal paper is supposed to be. From 2:11 thing start to become interesting. The gray/black bearded guy basically explains corporate tax rates. Nothing wrong here. He then goes on to describe how MNCs can shift their profit using transfer pricing methods and ends up calling TP money laundering (3:28). I wonder why the SEC hasn't audited me yet.

Pretty much all of the tax laws that are mentioned exist and can be used by companies. Undercurrent isn't wrong in saying that TP can be used to lower a companies tax burden. However, he is wrong in saying that they can just charge whatever they want and move money around like I spent it at the bar.

In the US transfer pricing falls under the IRC § 1.482 while the rest of the world follows OECD guidelines. The gist of both guidelines is that whenever a company conducts an intercompany transaction, the transaction must be done under arm's length standard which is defined by the IRS as:

A controlled transaction meets the arm's length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm's length result)

This means that if a company sells widgets to its subsidiary it must charge the same price it would to an unrelated third party. Sometimes determining the arm's length result is really easy. If you sell a similar widget to an unrelated party you pretty much have to charge your subsidiary the same price or the tax authority will come down on you. Such a transaction is called an comparable uncontrolled price and is by far the most preferred method to determine the transfer price. The problem comes when you sell your widget only to the subsidiary and not to an outside party. Or even more difficult when you charge your subsidiary royalties for the IP of the widget (which is the case for most tech companies). There are several methods to calculate the correct transfer price by using different financial ratios of comparable companies, valuing future net returns on your product, or even comparing ratios within different departments of the company. The issue with these methods is that they will never return a 'true' arm's length result and you can easily fudge the numbers to make it work. This is why Facebook, Apple, Google, Amazon, Starbucks, etc all have been in trouble with the tax authorities. They almost all undervalued their IP that they sold to their Iris/Dutch subsidiary, while the tax agencies overvalued them causing a difference that you'll hear about in the news. In these cases both parties can create their narrative in such a way that their arm's length result is the correct one. This is the underlying nature of transfer pricing; it isn't black and white, but much more 50 shades of gray without the kinky in it.

Nonetheless, a company cannot charge outrageous amounts for the intercompany transaction to easily shift money around. For example, Undercurrent states that companies can use intercompany loans to charge extremely high interest rates to offset profit to tax heavens. This cannot be done though. Interest rates charged on intercompany loans need to be at arm's length and therefore a company cannot charge 35% interest to its subsidiary. Often, the interest rate for intercompany loans will just follow AFR. MNCs can definitely use TP to their advantage, but to claim that they can effectively reduce to tax burden to zero is nonsense, let alone that TP is money laundering. The bad transfer pricing in this video is that it completely ignores the basic principle of transfer pricing by suggesting companies can just charge whatever they want for the intercompany transactions.

Also, I don't like Apple either.