Refers to tax minimization strategies used by
multi-divisional organizations

• Choice of transfer prices affects the division of profits among different parts of the company

• Companies can have an incentive to book profits in a jurisdiction with relatively low taxes

• Many international companies use transfer pricing
  to book revenue in select foreign subsidiaries
• Many US companies use transfer pricing
  to book revenue in select states

• Often applied to ownership of (and pricing for)
  intangible assets

Internal Revenue Code §482

• Governs pricing of transactions between related parties
• Statute

OECD

• Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

• International guidelines first issued in 1979
• Substantially revised in 1995
• Updated periodically
• OECD webpage
• Article

IRS issues new rules on transfer pricing

• Final and temporary regulations 8.01.06

• Eliminates use of the simplified-cost based method for pricing low-margin services
• Replaced by the services cost method

• Commentary

• Pepper Hamilton Aug 2006

Merck  2006

• Settles with IRS at net cost of $2.3B

• Form 8-K  2.20.07

• Faced $5.58B in tax liabilities

• News items:
• Stock falls 4% on filing of Form 10-Q
• MRK news - stock chart

• Form 10-Q  See Note 8 on page 17

Motorola  2006

• Faces $1.6B in tax liabilities

• Form 10-Q  See Note 5 on page 18

GlaxoSmithKline plc  2006

• Settles with IRS rather than going to trial

• Agrees to pay $3.1B to settle
• Largest tax dispute in US history

• GlaxoSmithKline Form 6-K

Symantec  2006

• IRS issues a Notice of Deficiency over transfer pricing

• Claims a deficiency of $900mm

• Over practices at VERITAS Software in 2000 and 2001

• Symantec acquired VERITAS in 2005
• See VERITAS-Symantec

• Symantec Form 8-K