Chapter 13

INTERNATIONAL

PRICING STRATEGY

TRA

NFE

R P

RIC

ING

refers to the pricing of

goods and services among

units within the corporation.

It serves as a measure of

the economic performance

of profit centers within the

enterprise. It differs from market

price , which measures

exchanges between a

company and the outside

world, for the net effect of

tranfer pricing is borne by

the same organization.

FAC

TO

RS

AFF

EC

TIN

G

TRA

NFE

R P

RIC

ING

1. Income tax liability

within the host country.

2. Income tax liability within the U.S3. Tariffs and/ or customs

duties within the hosts

country.4. Exchange controls within the host country

5. Profit repatriation restrictions within the

host country.

FAC

TO

RS

AFF

EC

TIN

G

TRA

NFE

R P

RIC

ING

6. Quota restrictions within

the U.S.7. Credit status of the U.S.

parent firm.8. Credit status of the

foreign subsidiary or

affiliates.9. Joint venture

constraints within the

hosts country.

TRA

NFE

R P

RIC

ING

METH

OD

All domestic and

foreign units are profit

centre's, and transfers

must be set at levels

that yield a reasonable

profit to both the selling

and buying units.

Profit is divided

according to functions

performed in producing

and marketing goods to

unrelated buyers .

TRA

NFE

R P

RIC

ING

METH

OD

Gross margins ( the spread

between production and

distribution costs and the

sale to an unrelated buyer )

are divided more or less

evenly between domestic

producing and foreign

marketing units.

Overall impact on

consolidated profit is the

paramount consideration

and profit is taken where it

is best for the total

corporation.

HA

ND

LING

INTER

DIV

ISIO

NA

L

CO

NFLIC

T Decentralized units of a

corporation usually are

profit centers . Each

profit center rewards and

benefits are dependent

on its bottom line

performance.

Thus, if the transfer

pricing system affect the

profits of a unit , it is

likely to lead to a conflict

between the units

involved.

DU

MPIN

G

refers to the practice

of pricing exports at lower levels than domestic price for the

same goods . As dumping may adversely affect domestic industry, many nations have legislated anti dumping laws.

LEA

SIN

G

As an alternative to

outright purchase, leasing is slowly emerging in importance

in international marketing . While setting leasing

prices presents difficulties for various

reasons, it nevertheless

provides a good entry

into markets otherwise

inaccessible because of

capital shortage.