...Introduction Transfer pricing has long been an important cost management topic for transactions among domestic subsidiaries. The concern is to promote actions and behaviors that seek to maximize the corporate performance and profitability rather than the subsidiary performance. Unlike transfer pricing between two divisions of the same company, this transactions between subsidiaries cross international boundaries, involve tax issues concerning the determination, analysis and adjustment of prices between this related entities. I. Transfer price 1. Transfer price definition The transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associate enterprises. They are the prices charged for any transaction between affiliates entities. This transfer may be commercial, financial or technical. According to the OECD, two companies are associated if one of the enterprises participates directly or indirectly in the governance, management, control or the capital of the other or if the same persons participate directly or indirectly to the management, control or the capital of both enterprises. They can be defined simply as transactions prices between companies of the same group and resident in different states. This type of transactions involves intra-group transactions crossing borders. Example: Within a MNE group, a subsidiary A established in France sells computers to another subsidiary B established...
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...TRANSFER PRICING Overview The essential feature of decentralization in large firms is the creation of responsibility centers (e.g. cost, profit, or investment centers). The performance of these responsibility centers is evaluated on the basis of various accounting numbers, such as standard and actual cost, divisional profit or return on investment. A central role of the management accounting system therefore is to evaluate (i.e. attach a dollar figure to) the transactions between the different responsibility centers. Under the subject cost allocation we studied alternative methods to charge user departments for the services rendered by service departments (frequently cost centers). Transfer prices are used to evaluate the goods and services exchanged between profit centers (divisions) of a decentralized firm. Hence, the transfer price is the price that one division of a company charges another division of the same company for a product transferred between the two divisions. 1. There are no cash flows between the divisions. The transfer price is used only for accounting purposes. 2. The transfer price becomes an expense for the receiving manager and a revenue for the supplying manager. 3. If intra-company transfers are accounted for at prices in excess of cost, appropriate elimination entries have to be made for external reporting purposes. Examples of items to be eliminated for consolidated financial statements include: 4. Intra-company...
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...Transfer pricing By John C. Hollas Illustration: Susanna Denti How to apply the appropriate transfer pricing methods to intercompany financial transactions In Canada, taxpayers are seeing an increased scrutiny of and more audit focus on intercompany financing transactions by the international tax auditors from the Canada Revenue Agency. The related party financial transaction being most commonly audited by the CRA are intercompany loans, factoring of trade receivables and provision of financial guarantees. This environment of rising transfer pricing controversy risk with respect to intercompany financial transactions conflicts directly with the multinational corporation's (MNC) increasing need to finance its foreign operations through intercompany, crossborder financial transactions. The transfer pricing risks and implications remain very significant both from a tax compliance standpoint and from a controversy risk management perspective. Today, MNCs need to mitigate the risk of significant transfer pricing adjustments by local and foreign tax authorities. While our focus is limited to the Canadian tax environment, it is critical to recognize that in all international related party transactions, with financial transactions being no exception, the transfer pricing issues include the other tax jurisdictions of the foreign related parties that are involved in the intercompany transaction. As such the transfer pricing legislation in those foreign tax jurisdictions must...
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...3 Effects of Exchange Rates On International Transfer Pricing Decisions Canri Chan (E-mail: canri.chan@miis.edu), Monterey Institute of International Studies Steven P. Landry (E-mail: steve.landry@miis.edu), Monterey Institute of International Studies Terrance Jalbert (E-mail: jalbert@hawaii.edu), University of Hawaii at Hilo Abstract Events leading to the passing of the Sarbanes-Oxley Act have led to increased concern with and scrutiny of potential management manipulation of financial statements. From an agency theory perspective, managers have incentives to manipulate organizational methods and choices in order to produce financial statements that those managers believe will maximize their incentive compensation. Transfer pricing represents one possible choice that managers can manipulate. This paper investigates whether exchange rates affect transfer pricing particularly as it relates to maximizing overall corporate profitability. The effects of taxes and government regulations have been explored in considerable depth in the transfer pricing literature. However, while transfer prices should also be affected by exchange rates in predictable ways, this variable has received comparably little attention in the literature. Inclusion of exchange rates in an analysis of transfer pricing and corporate profitability presents an opportunity to add to the literature. We conducted an experiment to examine how managers set transfer prices. We found that, while individuals were influenced...
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...determination of price for transferring goods, services, and assets beyond the national borders of a parent company, known as transfer pricing, remains a controversial challenge. Along with increasing globalization, international transactions between related parties (between parent company and their affiliates or between affiliates) are playing an increasingly significant role in world trade and economy. As multinational enterprises are said to account for about 60% of world trade, transfer pricing has become the number one issue in the international tax arena (Ping and Silberztein 36). There are several different methods utilized to determine transfer pricing. There are strong opinions on the most accurate method to document and report transfer pricing. The most preferred is the arm’s length principle, stating, “it should reflect the prices that would have been set, had those transactions taken place among independent entities” (Houston and Gracon 12). In this paper, I will discuss the difficulty in comparable pricing, the differences of direct tax and customs rules, and firms costly transfer pricing documentation that are all controversial challenges with the arm’s length principle. The Arm’s length principle, most preferred for many years, lacks the ability for a firm to acquire accurate comparable pricing. As Gareth Green, director of Transfer Pricing Solutions in the UK says: ‘Often the only real comparisons are commercially proprietorial transactions, which competing...
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...Answers: 1. Explain the strategies PrimeCo considered in internationalizing its operations. What are the advantages and disadvantages of each method? The strategies PrimeCo considered to enter the international market are the following along with the corresponding advantages and disadvantages of each strategy. a. Exporting – defined as the marketing of goods produced in one country to another. It is considered to be the easiest way of entering foreign markets. Exporting can be either indirect or direct. In general, the advantages of exporting are: i) manufacturing is home based, hence it is less risky that overseas based, ii) gives an opportunity to “learn” overseas markets before investing in bricks and mortar, and iii) reduces potential risks of operating overseas (FAO, 1997). Some of the disadvantages are: i) limited profit potential, ii) company gains no market information, or experience in new markets, iii) plants may not be located in low cost locations, iv) high transport costs, v) tariffs tend to be highest on finished goods, and vi) loss of control as markets are distant form production (http://uwf.edu/rsjoland/12%20Market%20Entry%20Strategies%20as%20Used%2004%201.pdf). b. Licensing – method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor. The following are the advantages and disadvantages of this strategy...
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...submitted Table of Contents Transfer pricing 3 Methods of fixing transfer price 4 1. Market based transfer prices 4 Buyer 4 Seller 4 Group 5 Conclusion 5 2. Full cost transfer prices 6 Buyer 6 Seller 7 Group 7 Conclusion 7 3. Cost-plus a mark-up transfer prices 8 Buyer 8 Seller 9 Group 9 Conclusion 9 4. Negotiated transfer prices 10 Buyer 10 Seller 10 Group 11 Conclusion 11 References 12 Transfer pricing Transfer pricing is the establishing the price of goods that are sold between related legal entities in a company. It is practiced by centralized organizations to monitor the transfer of products or service from one division of the company to another (O'brien & Oates, 2007). For example, the six segments of the General Electric Company are trading amongst themselves (General Electric Company, 2006). Methods of fixing transfer price Market based transfer prices The external market prices for the intermediate products are used to set the transfer price. The strategy presumes that the acquiring division will secure the products from the manufacturing division at the same price as in the external market. Although the external market is usually rarely or never accessed, the competitive price determines the minimal intra-organization transfer price (Feinshreiber, 2004). General Electric uses...
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...(“Riggers, “client, or “Company”) is audited by Stone LLC CPA firm (“Stone” or “auditor”). The Compa” ” ny builds and owns offshore drilling rigs. Riggers is a US-based corporation that recently expanded its operations into Brazil (the only foreign-based operations for Riggers). As a result of this expansion, the client has encountered two complex issues related to accounting for income taxes. During the 2012 year-end audit, the auditors must use professional judgment with regard to these two income tax accounting issues. The first issue relates to the client’s valuation allowance against a net operating loss (“NOL deferred ”) tax asset (“DTA”) in Brazil. The second matter is the Company’s uncertain tax position resulting from transfer pricing in the United States. These two items require judgment on the part of management, thus the audit engagement team must apply the professional judgment framework during its year-end audit. Valuation Allowance As of December 31, 2012, Riggers has a $59+ million NOL carryforward on its Brazilian corporate income tax return. In 2011, Riggers had booked a $86,956 valuation allowance against the DTA established in recognition of the future tax benefit of the NOL, as the client believed it was not more likely than not (>50%) that that portion of the NOL future tax benefit would be utilized. In 2012, Riggers estimates that it will have enough future income in Brazil to offset the NOL and, as a result, is not reporting any valuation allowance...
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...Performance Measurement & Control | BHP Billiton & PotashCorp: Chinese distribution | Transfer Pricing | | Your Name | 1/17/2011 | | Contents Executive Summary 3 Introduction 4 Transfer Pricing 4 Transfer Pricing: Cost rates, dual rates & market prices 7 PotashCorp Transfer Pricing policy 9 Performance Management issues 12 Conclusions 14 References 15 Appendix 16 Executive Summary In the constantly improving transfer pricing laws of China and given the Chinese fertilizer market’s future potential, it is worth to enter the market with a BHP Billiton’s division established there. The planned imports from PotashCorp provide the possibility for the use of transfer pricing to improve tax efficiency and thus the benefit of the whole organization. If performance measurement tools are used, this may underestimate the performance of the division using most of the methods such as market price and dual cost. The cost plus method turns out to be more on the division’s side but as the Chinese prices are lower than that of the world, the conditions appear to be supporting the method as beneficial to the company as a whole while the division is able to generate revenues for company at a low tax. Performance measurement tools seem to be less beneficial for large divisions based organization, where differences in dynamics render the largely homogeneous performance measurement indicators unable to serve the intended purpose. Introduction ...
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...pumps are assembled along with other parts. The other parts have a combined cost of $450 per pump variable cost, and $900 fixed cost. The assembled TA24 machine is then sold for a price of $2,500 per pump. The Vancouver division also knows that a Toronto-based company is willing to sell heart pumps to Miliken at a price of $425 per pump. Following are the three methods for transfer prices that can be considered in this scenario: 1. Market-based — Vancouver can buy the pumps at an outside price of $425. file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm (1 of 3) [05/06/2009 12:18:57 PM] file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm 2. Cost-based — The company's senior management considers a cost-based transfer price should be at 125% of full absorption cost. The cost of production is $140 + $70 + 90 = $300 x 1.25 = $375 3. Negotiated — This is negotiated between cost ($375) and market ($425). Assume management splits the difference at $400. Using market-based transfer prices generally leads to the most optimal pricing...
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...CHAPTER 23: TRANSFER PRICING Chapter Contents: - Definition and Overview - Transfer Pricing Options - Market-based Transfer Prices - Cost-based Transfer Prices - Negotiated Transfer Prices - Survey of Practice - External Reporting - Dual Transfer Pricing - Transfer Pricing and Multinational Income Taxes - Other Regulatory Issues Definition and Overview: A transfer price is what one part of a company charges another part of the same company for goods or services. In the excerpt from Casablanca, Rick apparently loaned Ferrari 100 cartons of cigarettes for which he was never repaid. Now that Ferrari owns both the Blue Parrot and Rick’s Café, he jokes about the fact that what was previously a debt that he owed to Rick, is now a “debt” from one nightclub that he owns to another nightclub that he owns. If Ferrari continues to transfer cartons of cigarettes between the two clubs, he might wish to establish a “transfer price” for cigarettes, but knowing Ferrari, he won’t bother. We will restrict attention to transfers that involve a tangible product, and we will refer to the two corporate entities engaged in the transfer as divisions. Hence, the transfer price is the price that the “selling” division charges the “buying” division for the product. Because objects that float usually flow downstream, the selling division is called the upstream division and the buying division is called the downstream division...
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...to believe they have agreed on the best deal possible * Negotiating and determining transfer prices will enhance the autonomy/ independence of both divisions b Negative * The result of a negotiated transfer price between divisions may not be optimal for the firm as a whole and therefore will not be goal congruent The negotiating process may cause harsh feelings and conflicts between divisions c 2. Not suitable for a decentralized structure when the autonomous divisions are measured on profitability, as the selling unit is unable to realize a profit Can lead to decisions that are not goal congruent if the buying unit decides to buy outside at a price less than the full cost of the selling unit d 3. A change in policy may be interpreted by the divisional managers as an attempt to decrease their freedom to make decisions and reduce their autonomy e If managers lose control of transfer prices and, thus, some control over profitability, they will be unwilling to accept the change to uniform prices Selling divisions will be motivated to sell outside if the transfer price is lower than market, as this behavior is likely to increase profitability and bonuses f Standard full manufacturing costs plus markup * The selling division will be motivated to control costs * The buying division may be pleased with this transfer price if the market price is higher g Market selling price of the products being transferred ...
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...GLOBAL TRANSFER PRICING SERVICES Global Transfer Pricing Review kpmg.com TAX © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Contents Introduction Country Snapshots Country Overviews Glossary of Terms Find out more 2 4 10 255 256 © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. 2 | Global Transfer Pricing Review Introduction © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved. Introduction | 3 As multinational companies continue to globalize their supply chains, transfer pricing is increasingly at the forefront of business transformation initiatives. Organizations recognize that transfer pricing strategies can add significant value to business projects and help fund future growth as they look to maximize efficiencies and minimize their global tax liabilities. The transfer pricing environment is constantly changing, in terms of both risks and opportunities. Multinational companies...
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...Riggers Inc (“Riggers, “client, or “Company”) is audited by Stone LLC CPA firm (“Stone” or “auditor”). The Compa” ” ny builds and owns offshore drilling rigs. Riggers is a US-based corporation that recently expanded its operations into Brazil (the only foreign-based operations for Riggers). As a result of this expansion, the client has encountered two complex issues related to accounting for income taxes. During the 2012 year-end audit, the auditors must use professional judgment with regard to these two income tax accounting issues. The first issue relates to the client’s valuation allowance against a net operating loss (“NOL deferred ”) tax asset (“DTA”) in Brazil. The second matter is the Company’s uncertain tax position resulting from transfer pricing in the United States. These two items require judgment on the part of management, thus the audit engagement team must apply the professional judgment framework during its year-end audit. Valuation Allowance As of December 31, 2012, Riggers has a $59+ million NOL carryforward on its Brazilian corporate income tax return. In 2011, Riggers had booked a $86,956 valuation allowance against the DTA established in recognition of the future tax benefit of the NOL, as the client believed it was not more likely than not (>50%) that that portion of the NOL future tax benefit would be utilized. In 2012, Riggers estimates that it will have enough future income in Brazil to offset the NOL and, as a result, is not reporting any valuation allowance...
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...The Impact of Transfer Pricing on Corporate Disclosures Written By: Roger Hsueh Aiming to plug tax collection leaks, impose reasonable tax burdens and bring Taiwan in line with the international trend, toward the end of 2004 the Ministry of Finance issued and put into effect "Income Tax Audit Standards for Transfer Pricing Inconsistent with Arm’s Length Transactions". Following the implementation of the transfer pricing audit standards, not only will the taxation authorities be able to investigate back five years to see if corporate income taxes were consistent with “arm’s length” transactions; henceforth the burden of proof will have shifted from the National Tax Administration to corporations. Corporations will have to furnish evidence on their own behalf to prove their transactions are consistent with arm’s length ones, furnishing the relevant documents. As a result of this, thousands of entities - affiliated companies, parts of corporate groups, foreign businesses in Taiwan, and factories set up in Mainland China - face heavy tax risk on their “related party transactions”. And for public companies, because of their larger scale of operations and the ease of obtaining their regularly issued financial statements, the disclosures in public company financial statements prescribed by the transfer pricing audit standards will have a major impact. As provided in “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, when a public company prepares...
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