Issues in Global Management Accounting - Transfer Pricing
Global Management Accounting The issues that can effect global cost and price decisions. Transfer Pricing.
Transfer Pricing <ul><li>Transfer pricing is a term used to describe inter-company pricing arrangements relating to transactions between related business entities. These can include transfers of intellectual property, tangible goods, services, and loans or other financing transactions. </li></ul><ul><li>The transfer price creates revenues for the selling division and purchase costs for the buying division, affecting each group’s operating income. </li></ul>Business Unit 1 Business Unit 2 Sub Assembly $
US and International Transfer Prices <ul><li>Domestic and international transfer prices should be evaluated separately. Within the United States, domestic transfer pricing is usually set at cost or cost plus freight. GAAP rules eliminate intercompany transactions. </li></ul><ul><li>International transfer pricing rules necessitate transfer prices set as if each company were independent of the other. Every government wants its to receive its fair share of tax revenue. </li></ul><ul><ul><li>Example: If the Mexican subsidiary of an American company did all transfer pricing at cost and only did work for the American company, the subsidiary would incur no profit or loss. </li></ul></ul>
Transfer Pricing Methods <ul><li>Cost Accountants often performs transfer pricing and associated reconciliations on a monthly basis. There are three different transfer pricing methodologies that are typically used. </li></ul><ul><li>Market-based </li></ul><ul><li>Cost-based </li></ul><ul><li>Negotiated </li></ul>
Market Based Transfer Prices <ul><li>Managers choose to use the price of a similar product or service that is publicly available to set transfer prices. Sources of prices can include trade associations or competitors. By using this approach, subsidiaries or divisions are forced to offer their products or services at competitive prices. </li></ul>
Cost Based Transfer Prices <ul><li>Managers choose a transfer price based on the costs of producing the intermediate product. Examples of cost based transfer prices include: </li></ul><ul><ul><li>Variable Production Costs </li></ul></ul><ul><ul><li>Variable and Fixed Production Costs </li></ul></ul><ul><ul><li>Full Costs </li></ul></ul><ul><ul><li>Any of the above costs plus markup </li></ul></ul><ul><li>This approach is useful when market prices are unavailable to determine market based transfer prices. </li></ul>
Negotiated Transfer Prices <ul><li>Managers in each of the sub-units negotiate a mutually acceptable transfer price that may not bear any resemblance to cost or market data. This approach is generally used when market prices are volatile. </li></ul>
Transfer Prices and Taxes <ul><li>Section 482 of the U.S. Internal Revenue Code governs taxation of multi-national transfer pricing. The rule requires that transfer prices between a company and its foreign division or subsidiary equal the price that would be charge by an unrelated third party in a comparable transaction (Comparable Profits Method). </li></ul><ul><ul><li>Transfer price are either market-based or “cost-plus” based. </li></ul></ul><ul><ul><li>The IRS does not give priority to any particular method, but requires companies to perform explicit analysis to show how the method was selected. </li></ul></ul>
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