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Transfer PricingMark Fielding-Pritchard

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Why Does TP Have a Bad Name Basic Scheme Tax in UK is 30%, Tax in India is 40% Markov makes bicycles in Scotland which cost $5,

sells in India for $25 What should be the transfer price? What if Markov Scotland sells to Markov in Far Far

Away (an offshore zone with tax rate 1% for $6 and MFFA sells on to in India for $24?

So tax authorities treat transfer pricing very seriously; and most developing companies have no concept of group relief so even transfers inside the country between group companies will be subject to TP investigations

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Transfer Pricing

For P5 remember ethical considerations Good transfer price will have elements of Goal congruence Fairness Autonomy Bookkeeping Minimise tax In a perfect market transfer price will be market

price

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Transfer price negotiated

Max price buyer will pay is lower of

External purchase price

Selling price minus marginal cost

Min price seller will take is marginal cost

Transfer Price when Seller Has Surplus Capacity

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Transfer price negotiated

Max price buyer will pay is lower of

External purchase price

Selling price minus marginal cost

Min price seller will take is marginal cost + lost contribution

Transfer Price when Seller Has No Surplus Capacity

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Practical Methods

Market Based Use market price as adjusted for differences Cost Based Cost + Standard cost Marginal cost Full cost Opportunity cost

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Other Methods

Marginal cost plus a lump sum Dual pricing

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Q49 SSA a)

Goal congruence Fairness Autonomy Bookkeeping Minimise tax

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Q49 SSA b)

Division A is currently producing 150000 units, therefore there is spare capacity of 10000 units

Knee Ankle Elbow Wrist Competitor Ankle

Contribution per unit

14 8 10 5 6

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Q49 SSA b) For quotation 1 A has spare capacity so we should manufacture Transfer price should be variable cost + negotiation (VC=7) Anticipated TP is $10.50 which is higher than $9. Division B will

buy from competitor so use $9 or some negotiated number For quotation 2 first 10000 should be at variable cost +

negotiation, For 8000 it is better to stop producing wrists and manufacture ourselves

I would recommend 18000 units at $9

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Q49 SSA b)

Overall principle is to maximise group profit Increased sales of ankle units first 10000 units will

increase profits by $80000 Contribution per unit is $8 if manufactured and $6 if

bought, as wrists generated $5 we should cut wrists and boost ankles

Transfer price needs to be not more than $9 to make it advantageous for B

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Q49 SSA b)

A B CompetitorSales Price 10.5 15 15Cost 7 10.5 9Contribution 3.5 4.5 618000 units 63000 81000 108000Tax (40/20/20%)

25200 16200 21600

After Tax Income

102600 86400

Transfer Price $10.5

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Q49 SSA b)

A B CompetitorSales Price 9 15 15Cost 7 9 9Contribution 2 6 618000 units 54000 108000 108000Tax (40/20/20%)

21600 21600 21600

After Tax Income

118800 86400

Transfer Price $9

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Q55 Landual lamps a)

What to write? In general some theory and some specifics Therefore what makes up good TP policy? Goal congruence, Fairness, Autonomy Bookkeeping

Minimise tax Housing- costs Electrical- market prices

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Q55 Landual lamps a)

Housing- costs Electrical- market prices Electrical earns 1557- 804-370= 383 However adverse variance of 575k probably means

that Electrical is not profitable

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Q55 Landual lamps a)

Housing is based on 8204 + 6902 As full actual costs there is no pressure to reduce

costs No allocated cost is covered

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Q55 Landual lamps b)

The change is from all costs to variable costs Usually where there are intricate designs overhead

is an important component of costs so this would not seem logical without more information

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Value For Money- Non For Profits

No readily available scale exists How to compare costs and benefits Timescales Externalities

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Value For Money 3Es

Economy Effectiveness Efficiency

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Value For Money

Goal Systems Resources Internal Processes

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Value For Money- Problems

Diverse objectives Multiple objectives Politics Benchmarking (&league tables)

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Value For Money-Target Setting

Central control Difficulty level All or nothing Too many targets Inappropriate targets Cost Ownership Gaming Conflict