Peter Meenan is a Professor of the Practice in Georgia Tech's School of Economics, where he shares his expertise from 29 years of transfer pricing at Deloitte. Watch Meenan's two-minute lecture to learn what transfer pricing is and how it impacts company taxes:
Transcript: What is Transfer Pricing?
Very simply, a transfer price is the price of a transaction between a company and, for example, a subsidiary or a second company that the original company owns. And mainly due to tax law, both by over 160 nations who have agreed to the standard and many U.S. states, any transaction between that company and its subsidiary or, more broadly, we call them related parties, has to happen at a price that they would exchange or trade with a third party.
Now, the main impact on taxes is that a company can use the transfer price it sets with a subsidiary for the transaction in a way to move profit. And typically, of course, the incentive would be: 'I can set the transfer price in a way that I can earn profit, where my taxes are lowest.'
And why can a company do that?
Well, because when the financial statements of a company are consolidated or looked at in the total company, any of these related-party — or any of these transfer pricing transactions — don't show up in the financial statements. So, they have no operational impact, if you will, from a financial statement perspective.
Learn more
Meenan suggests reading about the Coca-Cola transfer pricing case to learn more. The company lost a federal court case to the IRS in 2020 and was ordered to pay more than $3 billion in additional taxes.
"Even though many people have never heard of transfer pricing, it's so relevant that we can just go to our campus' closest neighbor to find a company that's been fundamentally impacted," Meenan says.
Did you know?
The Georgia Tech School of Economics offers flexible learning options, including a summer minor in economics, a five-year B.S. to M.S. in economics, and a graduate certificate in global development. Visit the School of Economics to learn more!
