100,000 are sold to Y Corporation, a U.S. company, at a price of $9 each, or $900,000
in total. V Corporation and Y Corporation are totally independent.
Y Corporation exports the kimonos to its subsidiary J Prime in Country J, incur-
ring a shipping charge of $1 per unit for the kimonos, or $100,000 in total shipping
charges. Y Corporation sells the kimonos for $11 each, reflecting gross sales of
$1,100,000, costs of $9 each or $900,000, shipping expenses of $1 per unit or
$100,000, and earns a profit of $1 per unit or $100,000.
J Prime then resells the kimonos for $20 each in Country J, thus undercutting V
Corporation’s sales price of $25 in country J. J Prime’s revenue is $2 million,
100,000 kimonos ×$20 each. J Prime is a discount operation, and has no intangi-
bles. The gross income from the transaction is $2 million. Net income to J Prime is
$2,000,000 minus the $900,000 purchase price for the kimonos and $100,000 for the
shipping of the kimonos, or a net of $1,000,000. The U.S. portion of the profit is
$100,000, one-tenth of the total.
The international examiner examines the Form 5472 for V Corporation^8 and the
Form 5471 for Y Corporation to determine whether these businesses are related par-
ties. The analysis is inconclusive. Nevertheless, the international examiner believes
that V Corporation and Y Corporation might be affiliates, and examines whether the
initial sales price of the kimonos of $9 is at arm’s length. The international examiner
compares sales to V Corporation and sales to others in the United States and con-
cludes the transactions with Corporation V are in fact at arm’s length.
The international examiner undertakes a SIC code analysis and establishes that Y
Corporation earns a comparable return on investment of its U.S. activities. As such,
the international examiner proposes no adjustment against Y Corporation.
(b) Suggestions. We suggest that the underlying purpose of Y Corporation’s activi-
ties was to develop a gray market structure against V Corporation, to take advantage
of V Corporation’s high profitability in Country J. That having been said, there is a
transfer pricing issue. The U.S. activities of the Y Corporation group are only one-
tenth of the total profits, and a significant portion of that profit is in purchasing the
kimonos in the United States. We note that the United States transfer pricing regula-
tions recognize marketing intangibles, but these regulations do not take purchasing
intangibles into account.
29.11 CORPORATE GOALS AND STRUCTURE. International examiners view the
decision-making process of a worldwide corporation as a monolith, seeking to max-
imize after-tax returns on investment. All too often, this perception is not correct, as
the worldwide business tends to have divergent goals, including:^9
- Executives may be paid and evaluated based on a defined segment of the over-
all business. Each such executive normally would seek to maximize his or her
income and profits, which may differ from the maximization goals of the entire
business.
29.11 CORPORATE GOALS AND STRUCTURE 29 • 17(^8) Robert Feinschreiber, “Overview of Foreign-Owned U.S. Corporations,” Transfer Pricing Handbook
#2, 3rd ed., edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 54.1.
(^9) Robert Feinschreiber, “Business Facets of Transfer Pricing,” Transfer Pricing Handbook#1, 3rd ed.,
edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 1.17.