TRANSFER PRICING PREPARED BY SINANA AND MOHIDDIN SHOHAIB
TRANSFER PRICING PREPARED BY: SINANA AND MOHIDDIN SHOHAIB B. COM(PROFESSIONAL) 5 TH SEMESTER THE YENEPOYA INSTITUTE OF ARTS, SCIENCE, COMMERCE AND MANAGEMENT
INTRODUCTION • The transfer price is the price charged by one part of a company when supplying goods or services to another part of the company, e. g. overseas subsidiary. • Transfer prices are particularly problematical. By manipulating the transfer prices charged it may be possible to minimise the global taxation cost for the group, i. e. to report low profits in countries with high taxes and high profits in countries with low rates • Large diversified groups will be split into numerous smaller profit centres, each preparing accounts for its own sphere of activities and paying tax on its profits. Multinational groups are likely to own individual companies established in different countries throughout the world. • Multinational transfer pricing is the process of deciding on appropriate prices for the goods and services sold intra-group across national borders.
BASIC PRINCIPLES OF TRANSFER PRICING The transfer price is the price charged by one part of an organisation when supplying goods or services to another part of the same organisation. • Maintain divisional autonomy • Maintain motivation for managers. • Asses divisional performance objectivity • Ensure goal congruence
MULTINATIONAL ASPECTS The setting of transfer prices is vital for multinational groups. When considering a multinational firm, additional (and in most cases overriding) international transfer pricing objectives are to • pay lower taxes, duties, and tariffs. Multinational firms will be keen to transfer profits if possible from high tax countries to low tax ones • repatriate funds from foreign subsidiary companies to head office • be less exposed to foreign exchange risks • build and maintain a better international competitive position • enable foreign subsidiaries to match or undercut local competitors’ prices • have good relations with governments in the countries in which the multinational firm operates. In particular, international transfer pricing requires careful consideration of multiple currency effects and multiple tax and legal regimes.
GENERAL RULE FOR TRANSFER PRICING • Transfer price per unit = Standard variable cost in the producing division plus the opportunity cost to the company as a whole of supplying the unit internally. • The opportunity cost will be either the contribution forgone by selling one unit internally rather than externally, or the contribution forgone by not using the same facilities in the producing division for their next best alternative use. The application of this general rule means that the transfer price equals: • The standard variable cost of the producing division, division if there is no outside market for the units manufactured and no alternative use for the facilities in that division. • The market price, price if there is an outside market for the units manufactured in the producing division and no alternative more profitable use for the facilities in that division.
TRANSFER PRICING SYSTEM A transfer pricing system should: • be reasonably easy to operate and to understand • be flexible in terms of a changing organisation structure • allow divisional autonomy to be maintained, since continued autonomy should motivate divisional managers to give their best performance • allow divisional performance to be assessed objectively • ensure that divisional managers make decisions that are in the best interests both of the divisions and of the whole company.
TYPES OF TRANSFER PRICE There are broadly three types of transfer prices: • Market-based prices: If an external market exists for the transferred goods then the transfer price could be set at the external market price. • Cost-related prices: in the absence of established market price many companies base the transfer price on the production cost of the supplying divisions. – Full (absorption) cost – Cost-plus • Negotiated prices: It may be necessary to negotiate a transfer price between subsidiaries, without using any market price as a baseline. This situation arises when there is no discemble market price because the market is very small or the goods are highly customized. This results in prices that are based on the relative negotiating skills of the parties. • Dual prices: practice of setting different prices in different markets for the same product or service. Often used as an aggressive move to take market share away from competitors.
LOCAL REGULATIONS AND TAX REGIMES LOCAL REGULATIONS AND TAXES ARRANGE PROFITS TO MINIMISE TAX HAVENS IMPORT TARIFFS EXCHANGE CONTROLS ETHICAL CONSIDERATION ANTI DUMPING LEGISLATION
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