abhishreshthaa
Abhijeet S
Transfer Pricing
Transfer pricing – refers to pricing of goods and services bought and sold by operating units or divisions of a single company.
Appropriate intra-corporate transfer pricing systems and policies are required to ensure profitability at each level.
In determining transfer prices to subsidiaries, global companies must address a number of issues, including taxes, duties and tariffs, country profit transfer rules, conflicting objectives of joint venture partners, and government regulations.
There are three major approaches to transfer pricing, which would vary with the nature of the firm, products, markets, and historical circumstances of each case:
1. Cost-based transfer pricing: Companies that use cost-based approach may arrive at transfer prices that reflect variable and fixed manufacturing cost only.
On the other hand, transfer pricing may be based on full costs, including overhead costs from marketing, research and development (R&D), and other functional areas.
2. Market-Based Transfer Price: This transfer price is derived from the price required to be competitive in the international market.
The constraint on this price is cost. To use market-based transfer prices to enter a new market that is too small to support local manufacturing, third-country sourcing may be required.
3. Negotiated Transfer Prices: This approach allows the organization’s affiliates to negotiate transfer prices among themselves.
The ideal standard of negotiated transfer prices is known as an arm’s length price: the price that two independent, unrelated entities would negotiate.
Transfer pricing – refers to pricing of goods and services bought and sold by operating units or divisions of a single company.
Appropriate intra-corporate transfer pricing systems and policies are required to ensure profitability at each level.
In determining transfer prices to subsidiaries, global companies must address a number of issues, including taxes, duties and tariffs, country profit transfer rules, conflicting objectives of joint venture partners, and government regulations.
There are three major approaches to transfer pricing, which would vary with the nature of the firm, products, markets, and historical circumstances of each case:
1. Cost-based transfer pricing: Companies that use cost-based approach may arrive at transfer prices that reflect variable and fixed manufacturing cost only.
On the other hand, transfer pricing may be based on full costs, including overhead costs from marketing, research and development (R&D), and other functional areas.
2. Market-Based Transfer Price: This transfer price is derived from the price required to be competitive in the international market.
The constraint on this price is cost. To use market-based transfer prices to enter a new market that is too small to support local manufacturing, third-country sourcing may be required.
3. Negotiated Transfer Prices: This approach allows the organization’s affiliates to negotiate transfer prices among themselves.
The ideal standard of negotiated transfer prices is known as an arm’s length price: the price that two independent, unrelated entities would negotiate.