3901799 transfer-pricing


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3901799 transfer-pricing

  1. 1. <ul><li>Transfer pricing </li></ul>
  2. 2. Transfer Prices Transfer Price is the price one subunit charges for a product or service supplied to another subunit Of the same Organization
  3. 3. Transfer Pricing- 4 criteria's 1Goal Congruence 2 Management Effort 3 Subunit Performance Evaluation 4 Subunit Autonomy
  4. 4. Purpose of Transfer Pricing Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs .
  5. 5. Transfer Costing- Methods 1Market Based 2Cost Based 3Negotiated
  6. 6. Market-Based Transfer Prices Transferring at Market Price is best if 1 Perfectly Competitive Market 2 Interdependence of Subunit is Minimal 3 No additional Cost-benefits to company
  7. 7. Market-Based Transfer Prices <ul><li>The major drawback to market-based prices is that market prices are not always available for items transferred internally. </li></ul>
  8. 8. Transfers at Cost <ul><li>About half of the major companies in the world transfer items at cost. </li></ul>
  9. 9. Transfers at Cost Variable costs Full cost Dual Pricing
  10. 10. Variable-Cost Pricing <ul><li>When market prices cannot be used, versions of “cost-plus-a-profit” are often used as a fair substitute. </li></ul>
  11. 11. Variable-Cost Pricing In situations where idle capacity exists, variable cost would generally be the better basis for transfer pricing and would lead to the optimum decision for the firm as a whole.
  12. 12. Negotiated Transfer Prices <ul><li>Companies heavily committed to segment autonomy often allow managers to negotiate transfer prices. </li></ul>
  13. 13. Dysfunctional Behavior Virtually any type of transfer pricing policy can lead to dysfunctional behavior – actions taken in conflict with organizational goals .
  14. 14. <ul><li>Factors affecting </li></ul><ul><li>Transfer prices. </li></ul>
  15. 15. Multinational Transfer Pricing Example <ul><li>An item is produced by Division A in a country with a 25% income tax rate. </li></ul><ul><li>It is transferred to Division B in a country with a 50% income tax rate. </li></ul><ul><li>An import duty equal to 20% of the price of the item is assessed. </li></ul><ul><li>Full unit cost is Rs100, and variable cost is Rs60 (either transfer price could be chosen). </li></ul>
  16. 16. Multinational Transfer Pricing Example Which transfer price should be chosen? Rs100 Why?
  17. 17. Multinational Transfer Pricing Example Income of A is Rs40 higher: 25% × 40 = (Rs10) higher taxes Income of B is Rs40 lower: 50% × 40 = Rs20 lower taxes Import duty paid by B: 20% × 40 = (Rs8)  Net savings = Rs2
  18. 18. Global Pricing Considerations
  19. 19. <ul><ul><ul><li>a) Tax regimes </li></ul></ul></ul><ul><ul><ul><li>b) Local Market conditions </li></ul></ul></ul><ul><ul><ul><li>c) Market Imperfections </li></ul></ul></ul><ul><ul><ul><li>d) Joint-venture partner </li></ul></ul></ul>Criteria’s for Transfer Pricing
  20. 20. Key drivers behind transfer pricing in Foreign Countries: <ul><li>Market Conditions </li></ul><ul><li>Competition </li></ul><ul><li>Profit for the affiliate </li></ul><ul><li>Tax Rates </li></ul>
  21. 21. Key drivers behind transfer pricing in Foreign Countries: <ul><li>Economic conditions </li></ul><ul><li>Import Restrictions </li></ul><ul><li>Customs Duties </li></ul><ul><li>Price Controls </li></ul><ul><li>Exchange Controls </li></ul>
  22. 22. <ul><li>Setting Transfer Prices </li></ul><ul><ul><li>a) Arm’s length prices: </li></ul></ul><ul><ul><li>use of market mechanism as a cue </li></ul></ul><ul><ul><li>for setting transfer prices. </li></ul></ul><ul><ul><li>b) Cost-based pricing (adds a mark-up) </li></ul></ul>