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    Transfer Pricing

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    AnuranjanSinha
    Transfer Prices are the amounts charged by one segment of an organization for a product or service that it supplies to another segment. Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs. About half of the major companies in the world transfer items at cost.

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    Transfer Pricing

    Uploaded by

    AnuranjanSinha
    4K views23 pages
    Transfer Prices are the amounts charged by one segment of an organization for a product or service that it supplies to another segment. Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs. About half of the major companies in the world transfer items at cost.

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    Transfer Prices are the amounts charged by one segment of an organization for a product or service that it supplies to another segment. Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs. About half of the major companies in the world transfer items at cost.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    4K views23 pages

    Transfer Pricing

    Uploaded by

    AnuranjanSinha
    Transfer Prices are the amounts charged by one segment of an organization for a product or service that it supplies to another segment. Multinational companies use transfer pricing to minimize their worldwide taxes, duties, and tariffs. About half of the major companies in the world transfer items at cost.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 23

    Transfer pricing

    Transfer Prices
    ● Transfer prices are the amounts charged by
    one segment of an organization for a
    product or service that it supplies to another
    segment of the same organization.
    Purpose of Transfer Pricing

    Why do transfer-pricing systems exist?

    – to communicate data that will lead to


    goal-congruent decisions

    – to evaluate segment performance and


    thus motivate managers toward
    goal-congruent decisions
    Purpose of Transfer Pricing

    Multinational companies use transfer


    pricing to minimize their worldwide
    taxes, duties, and tariffs.
    Advantages and
    disadvantages of basing
    transfer prices on total
    costs, variable costs,
    and market prices.
    Transfers at Cost
    ● About half of the major companies in the
    world transfer items at cost.
    Transfers at Cost

    What are some examples?


    Full cost plus a profit markup
    Variable costs
    Standard costs
    Actual costs
    Full cost
    Market-Based Transfer Prices

    If there is a competitive market for the product


    or service being transferred internally, using
    the market price as a transfer price will
    generally lead to the desired goal
    congruence and managerial effort.
    Market-Based Transfer Prices
    ● The major drawback to market-based prices
    is that market prices are not always
    available for items transferred internally.
    Variable-Cost Pricing
    ● When market prices cannot be used,
    versions of “cost-plus-a-profit” are often
    used as a fair substitute.
    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.
    Negotiated Transfer Prices
    ● Companies heavily
    committed to segment
    autonomy often allow
    managers to negotiate
    transfer prices.
    Dysfunctional Behavior

    Virtually any type of transfer pricing policy


    can lead to dysfunctional behavior – actions
    taken in conflict with organizational goals.
    The Need for Many Transfer
    Prices
    ● The “correct” transfer price depends on the
    economic and legal circumstances and the
    decision at hand.
    ● Organizations may have to make trade-offs
    between pricing for congruence and pricing
    to spur managerial effort.
    Factors affecting
    Transfer prices.
    Multinational Transfer Pricing
    Example
    ● An item is produced by Division A in a
    country with a 25% income tax rate.
    ● It is transferred to Division B in a country
    with a 50% income tax rate.
    ● An import duty equal to 20% of the price of
    the item is assessed.
    ● Full unit cost is Rs100, and variable cost is
    Rs60 (either transfer price could be chosen).
    Multinational Transfer Pricing
    Example

    Which transfer price should be chosen?

    Rs100 Why?
    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
    Global Pricing Considerations
    Criteria while making Transfer pricing
    decisions:

    a) Tax regimes
    b) Local Market conditions
    c) Market Imperfections
    d) Joint-venture partner
    Key drivers behind transfer pricing
    in Foreign Countries:

    a) Market Conditions
    b) Competition
    c) Profit for the affiliate
    d) Tax Rates
    Key drivers behind transfer pricing
    in Foreign Countries:
    e) Economic conditions
    f) Import Restrictions
    g) Customs Duties
    h) Price Controls
    i) Exchange Controls
    Setting Transfer Prices
    a) Arm’s length prices:
    use of market mechanism as a cue
    for setting transfer prices.
    b) Cost-based pricing (adds a mark-up)

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