General Transfer Pricing Information

When one part of a multinational organization in one country sells goods or services to another part in another country, the price charged for these goods or services is called a 'transfer price'. Not long ago, transfer pricing was a subject for tax administrators and one or two other specialists. But recently, politicians, economists and businesspeople have been waking up to the importance of who pays tax on what in international business transactions between different arms of the same corporation. Globalization is one reason for this interest, the rise of the multinational corporation is another. Once you take on board the fact that more than 60% of world trade takes place within multinational enterprises, the importance of transfer pricing becomes clear.

Transfer pricing is a great way to move goods from one company division or department to another without generating a lot of postings on the Accounts Receivable and Accounts Payable books. The value of the goods is simply moved from one division to the other, a process that greatly simplifies the process.

Normally, there is a simple form that accompanies the physical transfer of the goods, and is used by both the sender and the recipient to make appropriate posts in company accounting records. This process eliminates the necessity for invoices, tariffs, and other documents that would normally apply to a new purchase using an outside vendor.

While the main purpose of TP is to enhance the overall value of the corporate family of companies, there are instances when this type of transaction can be abused. This is especially true when transfers to international locations are conducted. Today, many countries have regulations to help prevent the use of transfer pricing as a means of evading taxes or similar unethical and illegal activities. Taxpayers who are aware of transactions or financial results that may initially look nonarm's length should carefully consider what information or context should be provided to a tax authority to influence the review.

A key element of TP is the presence of a buyer-seller relationship between units of a single company. Although owners and managers may not think of one location as selling services or parts to another unit, the various taxing authorities whether state or national may impose that view. Under such circumstances, a company has to determine the monetary value of the goods ro services and treat that amount as sale or revenue of the selling unit and as a cost of the buying unit. The two most common approaches to setting and revising TP are to apply cost-plus and market-based procedures. While cost-plus prices have the appeal of simplicity and ease of calculation, be aware that cost-plus TP can provide exactly the wrong incentive for the producing unit.

Any TP system creates internal revenues and expenses recorded for the goods and services transferred between units. The company must eliminate them to calculate the overall entities income. If TP exist between only two units of a company, the record keeping may be simple. It must create a structure to justify the many eliminations needed when transfer pricing is used at multiple levels of a company, such as in Examples production of plastic parts at Beta, the use of plastic parts in making subassemblies at Gamma and the use of subassemblies in making telephones at Alpha.

As business gets more complex, the likelihood grows that your company will eventually have to deal with transfer pricing issues. It is prudent to understand the subject now not when the taxing authorities are breathing down your neck.


Article Source: Rocco Picciano