Transfer Pricing – International Marketing

Overview

Transfer Pricing is Big News!

1. Current surveys would indicate that transfer pricing is one of the most important international tax issue facing multinational enterprises (MNE’s)

2. MNE’ s managers indicate that audit s by tax authorities are becoming a rule, rather than an exception.

3. In the last two years more fiscal government authorities have taken action on transfer pricing.

What is Transfer Pricing?

• Transfer pricing is a term used to describe aspects of intercompany pricing arrangements between related business entities and commonly applies to intercompany transfers tangible property, intangible property services and finance transfers.

• Intercompany transactions across borders are growing rapidly and becoming more complex.

Objectives of Transfer Pricing1. Competitiveness in the international

marketplace2. Reduction of taxes and tariffs3. Management of cash flows4. Minimization of foreign exchange risks5. Avoidance of conflicts with home and host

governments over tax issues and repatriation of profits

6. Internal concerns - goal congruence or subsidiary manager motivation

Transfer Pricing

The Parent The Parent CorporationCorporation

SubsidiarySubsidiaryBB

Latin AmericaLatin America

Subsidiary Subsidiary AA

North AmericaNorth America

Subsidiary Subsidiary CC

AfricaAfrica

$$$$$$ $$$$$$

• The price that is assumed to have been charged by one part of the company for products and services it provides to another part of the company, In order to calculate each division’s product and loss separately.

Transfer Pricing Methods • 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.

• 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 mark-up, if any, to allow the upstream division to

earn a profit on the transferred product.

• Negotiated transfer price: Senior management does not specify the transfer price. Rather, divisional managers negotiate a mutually-agreeable price.

Figure 1.0 Hiding Profits with Transfer Pricing

GREAT BRITAIN JAMAICA UNITED STATES

An item costs $100 to produce. It is sold to a Jamaican subsidiary for $100.

Tax rate: 52%

Tax paid: $0

The Jamaican subsidiary resells the item for $200 to a U.S subsidiary.

Tax rate: 5%

Tax paid: $5

The American subsidiary sells the item at a cost for $200. No profits earned. No tax paid.

Tax rate: 34%

Tax paid: $0

2. Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries

1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low

3. Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred

Benefits of Transfer Pricing

Challenges of Transfer Pricing

• Internal and external problems for the multinational corporation– Performance Measurement

• The clouding effect of manipulating intra corporate prices on a subsidiary’s apparent and actual profit performance

• Difficulty in maintaining relationships with subsidiaries that are negatively impacted by transfer pricing.

– Taxation• Tax and regulatory jurisdictions contribute to and

compound transfer pricing problems. Pricing that is justified and reasonable in the home country may not be perceived as such in the host country.

You are welcome to contact Nigel Bairstow at B2B Whiteboard your source of B2B Asia / Pacific marketing advice

http://www.linkedin.com/pub/nigel-bairstow/6/41b/726

http://twitter.com/#!/b2bwhiteboard