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8/12/2019 Harish Transfer Pricing FINAL
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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.htm8/12/2019 Harish Transfer Pricing FINAL
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AN OFFERING AT HIS LOTUS FEET
THANK YOU
JAI SAI RAM
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