transfer pricing
TRANSCRIPT
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 transferpricing to minimize their worldwidetaxes, duties, and tariffs.
Advantages and
disadvantages of basing
transfer prices on total
costs, variable costs,
and market prices.
Transfers at Cost
Variable costs
Full cost
Full cost plus a profit markup
Standard costs
Actual costs
What are some examples?
Market-Based Transfer Prices
If there is a competitive market for the productor service being transferred internally, usingthe market price as a transfer price willgenerally lead to the desired goalcongruence 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 thebetter basis for transfer pricing andwould lead to the optimum decisionfor 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 policycan lead to dysfunctional behavior – actionstaken 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.
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
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
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 affiliated) 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