Transfer Pricing

Transfer Pricing - Transcript

Objectives of Transfer Pricing
Minimisation of customs charges Repatriation of profits E g China allows India permits free repatriation of profits after payment of the applicable taxes for all approved investments other than in few specified industries In these consumer goods industries repatriation of profits is allowed only out of net foreign exchange earnings during an initial period of seven years from the commencement Set the TP low Performance Evaluation Problem arises as TP are set in MNCs by the parent company Strategic Partnership



Example Belgian Subsidiary to Reinvoicing center in Puerte Rico at 100 Puerte Rico to United States at 200 United States sells at 200 Belgian Tax rate is 42 and US states is 35 ARMS LENGTH PRINCIPLE BY OECD Are you evading tax or are you avoiding tax Packed at Dubai No import export tax export quota

Transfer Pricing Method
Variable Cost Method Desirable when the selling unit has excess capacity and TPs chief objective is to satisfy internal demand for the goods Not suitable if the selling unit is a profit or investment SBU Full cost method The market price method Best satisfies the arms length criteria for tax and management purpose Intermediate product price is not available Negotiated price method

Choosing the right TP method Key factors
Is there an outside supplier If not then TP should be cost or negotiated price Otherwise consider the relationship of insider VC with MP Is the seller s VC less than the MP No seller s cost are too high Go for external buying Yes consider capacity Is the selling unit operating at full capacity Order from internal unit deny external sales opportunity No then transfer at a cost between VC and MP In contrast if it is operating at a full capacity Work out the cost savings of internal sales with opportunity cost of lost sales Goal congruency is absolutely must

Is there an outside supplier Yes Is the seller s VC less than the outside Price Yes then answer the next question Is the seller operating at full capacity

No

Buy inside at cost or Negotiated price

No

Seller must look for ways to reduce cost Buy outside

No

Buy inside between low VC and High MP

Yes the seller is operating at full capacity And the contribution of the outside purchase of the entire firm is greater than the inside purchase buy outside Otherwise buy inside at market price