An introduction to transfer pricing is the topic for this week’s Motor Fuels Tax Minute. Join our hosts for an interview with Josh Finfrock, Director, International Tax, as he provides an overview and inside look at transfer pricing.
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Detailed Description of Weaver's Motor Fuels Tax Minute, Episode 17
00:00:00Leanne: Welcome to Weaver's Motor Fuel Tax Minute, where we talk all things motor fuel. Today we're joined by our guest, Josh Finfrock. He is a director in our international tax group, handling transfer pricing issues. We've got three questions for him today.
00:00:17Josh: Thanks for having me.
00:00:19Kelly: I'll start us off with the first question, Josh. Let's start from the beginning: what is transfer pricing?
00:00:27Josh: Transfer pricing is really referring to the accounting for related party transactions. So, any time you have a control group of companies that are going to be acting in concert, under common control, they're going to have transactions, whether it be supply chain transactions, services, financial transactions, things related to leasing of assets or intangible property. Those things done in that controlled context create an opportunity to shift income, or shift deductions, into multiple different taxing jurisdictions. Companies are obviously interested in optimizing that, but governments are also interested in maintaining rules and expectations so that they're getting fair taxation in their jurisdiction. That’s what we really refer to as the “arm’s length standard,” right? Which is where the IRS, for example, and other taxing authorities in other countries or even at state levels, will have the ability to adjust it to true income where they view someone as acted in a way that they wouldn't act with independent parties. What we’re usually trying to prove out with analytics, and looking at the functions assets risks of the different entities, is prove out that they are acting as they would with an independent party, but when they're accounting for it within their own group.
00:01:49Emilda: That leads into the second question, Josh, how does transfer pricing really impact the oil and gas industry?
00:01:58Josh: Sure. So, at the upstream side of things, you have a tremendous amount of different types of companies that are very global for their size - whether it's leasing equipment or they're subcontractors doing specialized services for the large exploration companies. They may be doing that in a variety of different countries, so they may be sharing equipment in different countries or transporting oil and gas products into wherever it's going to end up being stored. There may be vessels being leased and then the pricing of the actual goods crossing borders is part of it as well. Those are really common transactions between the services, the leasing type of transactions or even intercompany financing to operate those foreign operations.
After importing, there are a lot of companies that'll have different entities - maybe it's different states, maybe it's in multiple countries, where they're going to be refining product, they're storing product, they're getting it whether they're a wholesale transaction to their own controlled retail outlet or independent - they may have transactions there where that price that they move the goods is going to directly impact the taxable income of the given entity in that taxing jurisdiction. So, that's a pretty critical piece for them as far as establishing that they're acting as independent parties would act.
And then of course, you have centralized services for a lot of groups. As they get scaled up, we'll have centralized groups of services provided from a corporate kind of headquarter that may cross a lot of different borders and need to be properly borne by the beneficiary of that service.
00:03:53Leanne: Thanks, Josh. And our final question for you today is why do middle market companies need to appropriately apply the transfer pricing rules?
00:04:01Josh: The top reasons are really going to be companies want to optimize, or minimize, their global effective tax rate or even domestically their state rates where that is legitimate. Also companies want to avoid double taxation, right? Nobody's really excited about paying taxes, but they're definitely not excited about paying taxes on the same income in two places at the same time, known as double taxation, which is effectively the underlying risk where transfer pricing really got its start. Say a country adjusts taxable income on their side, where you may have already paid tax on a different declared income in another jurisdiction, now you have a double taxation situation that has to be unwound. There are mediation opportunities there that can help, but some of those things, the cost benefit can be tremendous hold up.
You also have companies that are thinking about secondary impacts where you really get into the transfer pricing effects, kind of the corporate income tax first or the state income tax. But then you get into the indirect taxes, the excise taxes, sales use type taxes, customs duties and type impacts that are all going to be indirect follow-ons of what the transfer pricing looks like. So, those are all important things that people are managing as well as optimizing their supply chain and how they manage their cash globally inside the group.
00:05:34Emilda: That was very insightful information. So I appreciate that. And we just want to thank all of our listeners for tuning in. We appreciate their support and encourage everyone to join us weekly as we continue to discuss important topics relating to the oil and gas and energy sector.