Description
concept of transfer pricing, nature of transfer pricing and various transfer pricing methods, regulations transfer pricing. It also includes transfer pricing and taxation.
TRANSFER PRICING
• Purpose: 1) To provide information that motivates divisional managers to make good economic decisions. • This will happen when actions that divisional managers take to improve the reported profit of their divisions also improves the profit of the company as a whole.
Transfer Pricing - Purpose
• 2) To provide information that is useful for evaluating the managerial and economic performance of the divisions. • 3) To intentionally move profits between divisions and locations. • 4) To ensure that divisional autonomy is not undermined.
Nature of tr. pricing & products
• Goods transferred from supplying division to the receiving division are known as intermediate products. Products sold by receiving division to outside world are known as final products. Objective of receiving division is to process the intermediate product further before it is sold as final product in the market. Transfer price is revenue for one division and cost to the other division.
Nature of tr. pricing & products
• In a centralized company, the decision as to whether an intermediate product should be sold or processed further is determined by comparing the incremental cost of and the revenues from further processing. • In a divisionalized organization structure, the manager of receiving division will treat the transfer price as an incremental cost and this may lead to decisions being made at division level, which could be incorrect at company level.
Transfer pricing methods
• • • • • 1) Market based transfer prices. 2) Marginal cost transfer prices. 3) Full cost transfer prices. 4) Cost plus mark-up transfer prices. 5) Negotiated transfer prices.
Resolving conflicts in tr. pricing
• 1) Dual-rate transfer pricing system • 2) Marginal cost plus fixed lump-sum fee. • 3) Setting transfer prices when there is no market for intermediate product. • 4) Imperfect market for the intermediate product. • 5) Transfer pricing in the context of capacity constraints.
Regulation of Transfer Pricing
• Transfer Pricing s highly regulated by Income Tax Act and Rules in India and also world-wide. In UK, The Income and Corporate Taxes Act, 1988 (Section 770) Finance Act, 1988 (Chapter 36 – Schedules 16 and 17) deal with international pricing issues. Organ. for Economic Cooperation and Development (OECD) issued guideline statement in 1995.
OECD guidelines
• These are based on arms’ length principle, which can be implemented using one of the following methods: • 1) The comparable uncontrolled price method, which uses externally verified prices of similar transactions involving unrelated prices. • 2) The resale price method, which deducts a percentage from the selling price from the final product to allow for profit. • 3) The cost plus method.
Economic analysis of tr. pricing
• 1) Perfect external market for the intermediate product. • 2) A perfect market for the intermediate product and the presence of selling costs. • 3) No external market for the intermediate product and a perfect market for the final product. • 4) Imperfect market for the intermediate product.
Transfer pricing & taxation
• Where divisions operate in different countries, taxation implications can be dominant influence. The aim is to set tr. Prices at levels which will ensure that most of the profits are allocated to divisions operating in low taxation countries. However, taxation authorities in every country are aware that companies can use transfer pricing system to manipulate the taxable profits that are declared in different countries.
Transfer Pricing & taxation
• Taxation authorities investigate the transfer pricing mechanisms of companies to ensure that they are not using the system to avoid paying local taxes of that country or to reduce the impact of taxation of that country.
Transfer pricing & taxation
• Income Tax Act and Rules in India also contain provisions for regulating the transfer pricing mechanism, more specifically relating to international (import and export) transactions.
doc_669910157.ppt
concept of transfer pricing, nature of transfer pricing and various transfer pricing methods, regulations transfer pricing. It also includes transfer pricing and taxation.
TRANSFER PRICING
• Purpose: 1) To provide information that motivates divisional managers to make good economic decisions. • This will happen when actions that divisional managers take to improve the reported profit of their divisions also improves the profit of the company as a whole.
Transfer Pricing - Purpose
• 2) To provide information that is useful for evaluating the managerial and economic performance of the divisions. • 3) To intentionally move profits between divisions and locations. • 4) To ensure that divisional autonomy is not undermined.
Nature of tr. pricing & products
• Goods transferred from supplying division to the receiving division are known as intermediate products. Products sold by receiving division to outside world are known as final products. Objective of receiving division is to process the intermediate product further before it is sold as final product in the market. Transfer price is revenue for one division and cost to the other division.
Nature of tr. pricing & products
• In a centralized company, the decision as to whether an intermediate product should be sold or processed further is determined by comparing the incremental cost of and the revenues from further processing. • In a divisionalized organization structure, the manager of receiving division will treat the transfer price as an incremental cost and this may lead to decisions being made at division level, which could be incorrect at company level.
Transfer pricing methods
• • • • • 1) Market based transfer prices. 2) Marginal cost transfer prices. 3) Full cost transfer prices. 4) Cost plus mark-up transfer prices. 5) Negotiated transfer prices.
Resolving conflicts in tr. pricing
• 1) Dual-rate transfer pricing system • 2) Marginal cost plus fixed lump-sum fee. • 3) Setting transfer prices when there is no market for intermediate product. • 4) Imperfect market for the intermediate product. • 5) Transfer pricing in the context of capacity constraints.
Regulation of Transfer Pricing
• Transfer Pricing s highly regulated by Income Tax Act and Rules in India and also world-wide. In UK, The Income and Corporate Taxes Act, 1988 (Section 770) Finance Act, 1988 (Chapter 36 – Schedules 16 and 17) deal with international pricing issues. Organ. for Economic Cooperation and Development (OECD) issued guideline statement in 1995.
OECD guidelines
• These are based on arms’ length principle, which can be implemented using one of the following methods: • 1) The comparable uncontrolled price method, which uses externally verified prices of similar transactions involving unrelated prices. • 2) The resale price method, which deducts a percentage from the selling price from the final product to allow for profit. • 3) The cost plus method.
Economic analysis of tr. pricing
• 1) Perfect external market for the intermediate product. • 2) A perfect market for the intermediate product and the presence of selling costs. • 3) No external market for the intermediate product and a perfect market for the final product. • 4) Imperfect market for the intermediate product.
Transfer pricing & taxation
• Where divisions operate in different countries, taxation implications can be dominant influence. The aim is to set tr. Prices at levels which will ensure that most of the profits are allocated to divisions operating in low taxation countries. However, taxation authorities in every country are aware that companies can use transfer pricing system to manipulate the taxable profits that are declared in different countries.
Transfer Pricing & taxation
• Taxation authorities investigate the transfer pricing mechanisms of companies to ensure that they are not using the system to avoid paying local taxes of that country or to reduce the impact of taxation of that country.
Transfer pricing & taxation
• Income Tax Act and Rules in India also contain provisions for regulating the transfer pricing mechanism, more specifically relating to international (import and export) transactions.
doc_669910157.ppt