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Global pricing concepts

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Global pricing concepts

Global pricing concepts

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  • 1. C O U R S E I N S T R U C T O R : S N E H A S H A R M A Global Pricing- A Few More Concepts
  • 2. L A R G E M N C ’ S H A V E A N E T W O R K O F S U B S I D I A R I E S S P R E A D A C R O S S T H E G L O B E . S A L E S T R A N S A C T I O N S B E T W E E N R E L A T E D E N T I T I E S O F T H E S A M E C O M P A N Y C A N B E Q U I T E S U B S T A N T I A L , I N V O L V I N G T R A D E O F - R A W M A T E R I A L S , C O M P O N E N T S , F I N I S H E D G O O D S , O R S E R V I C E S . TRANSFER PRICES ARE PRICES CHARGED FOR SUCH TRANSACTIONS . Transfer Pricing
  • 3. An Example  If a U.S.-based pharmaceutical company manufactures a drug in a factory that it operates in Ireland and transfers the drug to the U.S. for sale, a high transfer price increases divisional income to the Irish division of the company, and hence, increases the company’s tax liability in Ireland.  At the same time, the high transfer price increases the cost of product to the U.S. marketing division, lowers U.S. income, and lowers U.S. taxes.
  • 4. An Example  The company’s incentives with regard to the transfer price depend on whether the marginal tax rate is higher in the U.S. or in Ireland.  If the marginal tax rate is higher in the U.S., the company prefers a high transfer price, whereas  if the marginal tax rate is higher in Ireland, the company prefers a low transfer price.  The situation reverses if the drug is manufactured in the U.S. and sold in Ireland. The general rule is that the company wants to shift income from the high tax jurisdiction to the low tax jurisdiction.
  • 5. Factors affecting transfer price decisions  Market conditions in foreign country  Competition in foreign country  Reasonable profit for foreign affiliate  Income Taxes  Economic Conditions in the foreign country  Import Restrictions  Custom duties  Price Controls  Taxation in the foreign country  Exchange Control
  • 6. Market-based transfer price Cost-based transfer price Negotiated transfer price Transfer Pricing Options
  • 7. Transfer Pricing Options  Market-based transfer price: In the presence of competitive and stable external markets for the transferred product, many firms use the external market price as the transfer price.  ARM’S LENGTH PRICES  Negotiated transfer price: Senior management does not specify the transfer price. Rather, divisional managers negotiate a mutually- agreeable price.
  • 8. Transfer Pricing Options Cost-based transfer price: The transfer price is based on the production cost of the upstream division. A cost-based transfer price requires that the following criteria be specified: Actual cost or budgeted (standard) cost. Full cost or variable cost. The amount of markup, if any, to allow the upstream division to earn a profit on the transferred product.
  • 9. Cross Country Tax Rate Differentials Encourage Many MNC’s To Set Transfer Prices That Shift Profits From High Tax To Low Tax Countries To Minimize Their Overall Tax Burden. INTERNATIONAL TAX ARBITRAGE
  • 10. A CRITERION ACCEPTED BY TAX AUTHORITIES WORLDWIDE AS THE INTERNATIONAL STANDARD FOR ASSESSING TRANSFER PRICES BASIC ARM’S LENGTH STANDARD (BALS)
  • 11. BALS  There are three methods to calculate BALS prices:  Comparable /uncontrollable prices  The parent company should compare the transfer prices of its controlled subsidiary to the selling price charged by an independent seller to an independent buyer of similar goods or services.  Resale prices  It determines BALS by subtracting the gross margin percentage used by comparable independent buyers from the final third party sale price.  Cost-plus  It fixes BALS by adding the gross profit mark up percentage earned by comparable companies performing similar functions to the production costs of the controlled manufacturer or seller.
  • 12. DUMPING OCCURS WHEN IMPORTS ARE BEING SOLD AT UNFAIR PRICES. GLOBAL PRICING AND ANTI- DUMPING REGULATION
  • 13. ANTI-DUMPING  To minimize risk exposure to anti-dumping actions, exporters might pursue different marketing strategies  Trading Up: Move away form low value to huge value products via product Differentiation  Service Enhancement: Adding support services to the core product  Distribution and Communication  Establishment of communication channel with local competitors  Entering into cooperative agreement with them
  • 14. C O O R D I N A T I O N B E T W E E N P R I C E S I N D I F F E R E N T C O U N T R I E S PRICE COORDINATION
  • 15. Factors affecting the price coordination  Nature of customers  Amount of product differentiation  Nature of channels  Nature of competition  Market Integration  EU  Internal Organization  Decentralized /centralized companies  Government Regulation
  • 16. Alternatives to promote price coordination  Economic Measures  Rationing (Country wise)  Centralization  Formalization  Formal set of price rules for country mangers to comply with  Informal Coordination  Best price gatherings
  • 17. AN UMBRELLA TERM USED TO DESCRIBE UNCONVENTIONAL TRADE FINANCING TRANSACTIONS THAT INVOLVE SOME FORM OF NON-CASH COMPENSATION COUNTERTRADE
  • 18. Forms of Counter Trade  Barter-  direct exchange of goods or services having equivalent values without a cash transaction.  It is most common in deals that involve subsistence economies. Barter is also sometimes introduced into existing contracts to recover debt through goods when the debtor cannot pay cash
  • 19. Forms of Counter Trade  Clearing Agreement  Under this form, two governments agree to import a set specified value of goods from one another over a given period. Each party sets up an account that is debited whenever goods are traded. Imbalances at the end of the contract period are cleared through payment in hard currency or goods.  One clearing agreement between Indonesia and Iran specified that Indonesia would supply paper, rubber, and galvanized sheets in exchange for 30,000 barrels per day of Iranian crude oil
  • 20. Forms of Counter Trade  Switch-trading This is a variant of clearing arrangements where a third party is involved. In such deals, rights to the surplus credits are sold to specialized traders (switch traders) at a discount. The third party uses then the credits to buy goods from the deficit country.
  • 21. Forms of Counter Trade  Buyback or compensation  involves repayment in the form of goods derived from directly from, or produced by, the technology, plant, or equipment provided by the seller  A typical example of a buyback contract is an agreement that was settled between PALMCO Holdings, Malaysia’s biggest palmoil refiner, and Japan’s Kao Corporation.The contract set up a $70 million joint venture to produce palm oil byproducts in Malaysia. Kao was to be compensated by 60 percent of the output that it could use as inputs for producing detergents, cosmetics, and toiletries.
  • 22. Forms of Counter Trade  Counterpurchase  Similar to buyback arrangements, two parallel contracts are set up. Each party agrees to buy a specified amount of goods from the other for hard currency over a set period. Contrary to buybacks, the products are unrelated. Typically, the importer will provide a shopping list from which the exporter can choose.  In October 1992, PepsiCo set up a joint venture in Ukraine with three local partners. Under the agreement, the partnership was to market ships built in Ukraine. Proceeds from the ship sales were to be used to buy soft-drink equipment, to build bottling plants, and to open Pizza Hut restaurants in Ukraine
  • 23. Forms of Counter Trade  Offsets  Offset is a variation of counterpurchase: the seller agrees to offset the purchase price by sourcing from the importer’s country or transferring technology to the other party’s country.  There are two different types: direct and indirect offset.  With direct offset, the supplier agrees to use materials or components sourced from the importing country.  Indirect offset refers to a contractual arrangement that involves goods or services unrelated to the core goods to be exported. • An offset contract between Indonesia and General Dynamics to buy F-16 aircraft, stipulated that some of the parts would be supplied by PT Nusantara, an Indonesian manufacturer.
  • 24. Motives Behind Counter Trade  Gain access to new or difficult markets  Overcome exchange rate controls or lack of hard currency  Overcome low country creditworthiness  Increase sales volumes  Generate long term customer goodwill
  • 25. Benefits of Countertrade  Allows entry into difficult markets  Increases company sales  Overcomes currency controls & exchange problems  Increases sales volume  Overcomes credit difficulties  Allows fuller use of capacity  Allows disposal of declining products
  • 26. Disadvantages of Countertrade  No “in house” use of goods  Time consuming and complex negotiations  Uncertainty  Increase costs  Difficult to resell goods by offsets  Brokerage costs  Getting businesses in which firm may have no knowledge  Risky if commodities are involved
  • 27. Pros and Cons of Countertrade  Gives firms a way to finance an export deal when other means are unavailable.  Foreign governments may require it.  Helps countries that don’t have sufficient foreign currency reserves. However:  May involve defective goods.  Must invest in in-house trading department  expensive and time consuming.  Most attractive to large, diverse multinational enterprises
  • 28. THAT’S ALL FOR TODAY