Many of us think how come multinational companies like Apple Inc. etc earn huge amount of money. No doubt Apple has very successful products such as iPhone, iPad , iPod and Macintosh computer etc.
But is there anything else that needs to be unearthed?
Let us see how some of these unknown facts thorough a simple example as always.
Let's assume a parent company "P", which has headquarters in Ireland and a subsidiary company "S", which operates in USA.
Tax rate in USA is 30% and that in Ireland is 10%.
The company is in the business of making and selling phones.
Let's assume the market price of the phone in USA is 1000 $ and the cost of manufacturing is 500$.
So if company S sells a phone, it gets a profit of 500$ and it will pay 30% of 500$ tax i.e.150$ to US government.
Everything is fine till now.
But now company P plays one fine trick to earn more money.
Company P tells company S , " You buy phone from us for 900$ and sell in USA for 1000$"
By this transaction profit of company S becomes 100$ and tax that S pays to US government becomes 30% of 100$ i.e. 30$.
Company P sitting in Ireland earns 400$ profit after subtracting 500$ manufacturing cost.
Company P now pays 10% of 400$ i.e. 40$ as tax to Irish government.
In total company has paid 70$ tax. Earlier it used to pay 150$ in taxes.
This is how company saved 80$ per phone.If company sells billions of phones per year it will save billions of dollars.
Moral or legal:
These kind of transfer pricing mechanisms are perfectly legal. But whether they are moral is the question that needs to be addressed.
Many of these big companies lobby in the government and bend the lawmakers in their favor by paying huge sums of money to lobbyist and many big shot legal firms.
So these companies get to decide the market power.
As small companies do not have enough money to shell out, they have to pay huge sums of taxes and eventually they will either become bankrupt or be bought by big companies.
Healthy competition is the only thing that benefits all the stakeholders. But by killing competition these companies are ultimately killing new ideas and consumer benefits.
