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Introduction
Adidas group is one of the largest multinational producers of sports footwear, apparel, and accessories. Its products are available virtually in every country. Its activities are directed from its headquarters in Herzogenaurach, Germany. Reebok headquarters are located in California (Adidas Group 2012).
Due to the company’s international nature of business, various issues face the company in regards to taxation. One of the major issues that the company deals with every year of its operation is double taxation due to overlapping. Double taxation is experienced when a company or an individual is taxed twice for the same asset or income. This is mostly the case when there are overlapping jurisdictions of taxation and also when assets, incomes, and consequent transactions are subject to these jurisdictions (Caplan, 2003).
To reduce or curb these losses, Adidas Company has taken several measures such as foreign tax credit. A foreign income credit is when an individual or a firm can take credit for taxes against its bills, however, the tax credit has several limitations. A good example is a case of credit being limited to the tax for which the credit is allowable (Caplan, 2003).
On the other hand, the company benefits adversely from the benefits provided by tax treaties. A tax treaty is whereby the mother country of a company enters into a contract with other countries to promote cross-border investment and economic activities. This plays a crucial role in the elimination of double taxation, assists the government bodies to enforce the laws of taxation, and reduce barriers to international investments. Adidas Company has highly benefited from these tax treaties as German and US governments have been striking this type of treaty for over 70 years.
Transfer Pricing
When one part of a big multinational company transfers goods or services to another part in another country the price charged for these goods or services is referred to as transfer price. The main purposes of transfer pricing are to evaluate divisional profits and the calculation of income taxes (Pricewaterhousecooper, 2003).
In Adidas, the transfer of its products can take any form downstream, upstream, or from one subsidiary to another. The main role that is played by the Adidas transfer pricing, is shifting income from high to low tax jurisdictions. For example, if the Adidas products are being manufactured in Germany and transferred to the US for sale, a high transfer price raises divisional income to the German division of the company, and hence increases the company’s tax liability in Germany. It is therefore evident that the company’s incentives of the transfer price depend on the marginal tax rate in the country of the transfer. If the marginal tax rate is higher in the transfer country the company prefers higher transfer prices (David, 2006).
However, there are limits, to which companies can shift income in this manner, in the case where market prices are available for the products transferred, the tax authorities usually impose the market base transfer price. According to David (2006) when the prices based on the markets prove not to be feasible, rules are specified by the US tax laws, and tough rules are set for the companies willing to shift incomes. This act aids in ascertaining that the prices are feasible.
References
Adidas Group. (2012). What We Do. Web.
Caplan, D. (2003). Management Accounting. Web.
David, M. (2006).Transfer Pricing and Taxation. Web.
PriceWaterHouseCooper. (2003). Corporate taxes 2002-2003: Worldwide summaries. New Jersey: John Wiley and Sons.
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