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AN OFFERING AT HIS LOTUS FEET

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MULTINATIONAL

Transfer Pricing

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Transfer PriceA Transfer Price is the price charged when onesegment of a company provides goods or services toanother segment of the company.

The transfer price creates revenues for the sellingsubunit and purchase costs for the buying subunits,affecting each subunits operating income.

These operating incomes can be used to evaluatesubunit performance and to motivate their managers.

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OBJECTIVES OF MULTI-NATIONAL

TRANSFER PRICING Minimizing Taxes and tariffs.

Minimizing exchange risks. Increasing share of profit from Joint ventures.

Bypassing profit repatriation restrictions.

Optimizing managerial performance evaluation and reward systems.

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Cost Minimization Objectives and

Related Transfer PricesObjective Transfer Pricing Rule

Minimize income TaxTransfer to lower tax rate country Low price

Transfer to Higher tax rate country High price

Minimize import duties Low price

Protect foreign cash flows fromcurrency devaluation High price

Avoid repatriation High price

Improve competitive position Low Price

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What Transfer Price to apply?In a well designed Transfer-Pricing system,optimizing subunit performance leads to optimizingthe performance of the company as a whole.What Transfer Price to charge between thesegments?

If price is set too high, this may encourage potential users

to buy these services from outside the organization, or ifthey must use these resources, they may sub-optimize theuse in order to cut costs.

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Approaches used to set Transfer PricesNegotiated Transfer Prices: Allow themanagers involved in the transfer to negotiate

their own transfer price.Cost-Based Transfer Prices: Set Transfer

prices at cost.

Market-Based Transfer Prices: Set Transfer prices at the Market Price

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Comparison of Different Transfer-

Pricing Methods NegotiatedCost-basedMarket priceCriteria

yesOften, but not alwaysYes, when markets arecompetitive

Achieves GoalCongruence

Yes, but transfer pricesare affected by

bargaining strengths

Difficult unless transfer price exceeds full costs

Yes, when markets arecompetitive

Useful forevaluating subunit

performance

YesYes, when based on budgeted costs; lessincentive to controlcosts if transfers are

based on actual costs

YesMotivatesmanagement effort

Yes, because it is basedon negotiations betweenunits

No, because it is rule- based

Yes, when markets arecompetitive

Preserves SubunitAutonomy

Bargaining &negotiations take time&may need to bereviewed repeatedly.

Useful for determiningfull cost of products andservices; easy toimplement.

No market may exist ormarkets may be imperfect orin distress

Other factors

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METHODS OF DETERMINING THE ALP

(a)Comparable Uncontrolled Price Method('CUPM')

(b) Resale Price Method ("RPM')

(c) Cost plus method ('CPM')

(d) Profit Split Method ('PSM')

(e) Transactional Net Margin Method ('TNMM')

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General Guideline for Transfer-PricingSituations

There is no Transfer-pricing method thatmeets all the criteria.

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Penalties

Penalties have been provided as a disincentive for non-compliance with procedural requirements are as follows:

(a) Penalty for Concealment of Income - 100 to 300 percent ontax evaded.(b) Failure to Maintain/Furnish Prescribed Documentation -2% of the value of the international transaction.

(c) Penalty for non-furnishing of accountants report - INR100,000 (fixed).The above penalties can be avoided if the taxpayer proves thatthere was reasonable cause for such failures.

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Conclusion

Transfer pricing is a globally evolving areaand with practice and further experience it

will be fine-tuned.Transfer pricing is not an exact science. It is amatter of judgement and finding an answer.

CMAs have an important role to play tomake this more refined, accurate, andcomparable.

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REFERENCES

TRANSFER PRICING: TECHNIQUES AND USES-Ralph L. Benke & James Don Edwards

MANAGEMENT ACCOUNTANT JOURNAL - MAY 2012

INTERNATIONAL ACCOUNTING

-Shahrokh M. Saudagaranwww.accounting4management.com/international_aspects_of

_transfer_pricing.htm

http://www.accounting4management.com/international_aspects_of_transfer_pricing.htmhttp://www.accounting4management.com/international_aspects_of_transfer_pricing.htmhttp://www.accounting4management.com/international_aspects_of_transfer_pricing.htmhttp://www.accounting4management.com/international_aspects_of_transfer_pricing.htm

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AN OFFERING AT HIS LOTUS FEET

THANK YOU

JAI SAI RAM

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