PGDBFS 103 International Financial Accounting and

Transcript:PGDBFS 103 International Financial Accounting and:
PGDBFS 103 International Financial Accounting and Policy (IFAP) International Transfer Pricing International Transfer Pricing Transfer pricing - the determination of the price at which transactions between related parties will be carried out. Related party transactions include transactions between parent and subsidiaries as well as within entities of the same group. Related party transactions - a significant portion of the international trade. Types of inter-company transactions and its associated price: Factors that impact transfer prices determination: Objective the head-office wishes to achieve through transfer pricing: One possible objective relate to management control and performance evaluation. Another possible objective relates to minimization of one or more types of cost. E.g. taxes Laws that exist in most countries governing how the inter-company transactions across its boarders should be priced. These laws are established to make sure that multinational corporations are not able to avoid paying their fair share of taxes, duties. In making transfer pricing decisions, multinational corporations will have to strike a balance between corporate objectives and complying with applicable transfer pricing laws and regulations International transfer pricing methods Cost-based transfer price The transfer price here is based on the cost to produce the good or service. Cost based systems are easy to use Inefficiency of one entity may be transferred to other entities; no incentive for selling division to control costs. Use of standard costs rather than actual costs could alleviate this problem. Market-based transfer price Price based on that would be charged to an unrelated customer, or prices charged in the market for similar products / services. Avoids the problems associated with cost based prices and provides a good basis for evaluating the subsidiary’s performance. The efficient working of a market based system depends on existence of dependable market prices. Negotiated prices Here the subsidiary managers will have the freedom to bargain with one another to determine the price, thereby preserving the autonomy of the subsidiary managers. Disadvantages : Time it may require for the price negotiations; performance of the units being more dependent on its negotiation skills rather than the ability to control costs and generate profits. Objectives of international transfer pricing Performance evaluation To fairly evaluate the performance of both parties to an inter-company transaction, the transfer should be made at a price acceptable to both parties. An acceptable price could be determined by reference to: external market prices, or allowing the two parties to the transaction to