... Complex organizational structures help achieve business objectives such as increased profitability and reduced risks. Also, these complex structures allow the company to reduce its overall tax burden. One such strategy is discussed in this paper. Transfer pricing allows the company to price the inter-company transactions. Transfer pricing simplifies the accounting of transactions that take place between affiliated or related entities. Companies have freedom in valuing inter-company transactions. But, if strategically implemented, this strategy allows the company to save taxes and retain large amount of profits. Keywords: Transfer mispricing, tax-havens, Double Irish Dutch Arrangement Transfer Pricing Transfer pricing is the methodology used to set the prices for goods sold or services provided between related entities within an enterprise. Related entities are those which are under control of a single corporation and include branches and companies that are wholly or majority owned ultimately by the parent company. Generally, such a transfer price should be equal to the price which the entity would charge to an independent customer, an arm’s length customer. Such a price is termed as an “arm’s length price” (Transfer Pricing, Wikipedia, 2015). Financial accounting does not differentiate between affiliates and treats the corporate group as a single entity. But the federal income tax law treats affiliates as separate economic actors. This allows multinational companies a...
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...Transfer Pricing Kim: “I ... don’t understand why it would make sense to pay $450/ton for pulp [to buy internally from Northwestern’s U.S. pulp mills] when I can get it for $330/ton from Chile.” Ewing: “I understand your motivation for wanting to source the pulp from Chile, but it is important [to buy inside] for the corporation to act as an integrated team.” Barrett and Slape (2000: 597) Executive summary The quote above is an excerpt from a phone conversation between Bill Ewing, the Vice President of Northwestern Paper Company 1, and Arthur Kim, the Director of Northwestern’s South Korean subsidiary. This conversation rises questions on the advantages and disadvantages of utilizing internal transfer prices. Such as: given that some subsidiaries are located in lower tax jurisdictions, would it not be logical to set lower internal transfer prices to those subsidiaries? Would it not be logical to allow the Korean subsidiary to purchase from outside suppliers given that internal transfer prices are much higher than market prices in Chile? Allowing subsidiaries to outsource externally would lead to the bankruptcy of the US subsidiaries, which would not have enough demand for their products? What are the advantages and disadvantages of a reward system based on the allocation of internal consumption? Is the allocation process “fair” to each subsidiary? Is it “fair” to the company as a whole? Questions and doubts on transfer pricing probably haunt not only Mr. Ewing and the Northwestern...
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...length price. * The CUP method is the most direct way of ascertaining an arm’s length price. It involves the direct price comparison for the transaction of a similar product between independent parties. * Comparability Analysis * An uncontrolled transaction is comparable to a controlled transaction for purposes of the CUP method if one of the following conditions is met: * None of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the price in the open market; or * Reasonably accurate adjustments can be made to eliminate the material effects of such differences. * An MNE using the CUP method to determine its transfer price must first identify all the differences between its product and that of the independent manufacturer. The MNE must then determine whether these differences have a material effect on the price, and adjust the price of products sold by the independent manufacturer to reflect these differences, to arrive at an arm’s length price. A comparability analysis under the CUP method should consider amongst others the following: * Product characteristics such as physical features and quality. * If the product is in the form of services, the nature and extent of such services provided. * Whether the goods sold are compared at the same points in the production chain. * Product differentiation in the form of patented features...
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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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...1. Introduction Transfer Pricing is becoming highly important as soon as a multicorporate enterprise or business is structured across borders. Transfer Pricing deals with structuring international transfer prices within a multicorporate enterprise or business, in particular the evaluation of tangible and intangible assets be-tween business entities within the same multicorporate organisation or, more specifically, the price one segment (subunit, department, division and so on) of one organisation charges for a product or service supplied to an-other segment of the same organisation. Every multicorporate enterprise or business aims at minimising its tax obligations in order to maximise its overall profits. In principal, multicorporate businesses have to pay tax in their respective host countries, based on the share of their profit which arises in (or is allotted to) the respective business in such host country. These host countries can be different in various respects e.g. tax systems, customs duties, currency exchange rates, legislation and so forth. As a result, Transfer Pricing also affects revenue and customs authorities, investors, creditors and alike. The obligation to comply with national and international tax regulations regularly conflicts with the goal of a tax-efficient allocation of profits within a multi-national entities on the one hand and the respective tax legislation which is primarily nationally-focused on the other hand. Thus, an anticipatory business...
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...The Fuqua School of Business Duke University International Strategy: WBA 434 Professors Heath, Huddart, & Slotta Transfer Pricing 1. Overview An essential feature of decentralized firms is responsibility centers (e.g., cost-, profit-, revenue-, or investment-centers). The performance of these responsibility centers is evaluated on the basis of various accounting numbers, such as standard cost, divisional profit, or return on investment (as well as on the basis of other non-accounting measures, like market share). One function of the management accounting system therefore is to attach a dollar figure to transactions between different responsibility centers. 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. The basic purpose of transfer pricing is to induce optimal decision making in a decentralized organization (i.e., in most cases, to maximize the profit of the organization as a whole). Profit Center : Any sub-unit of an organization that is assigned both revenues and expenses. In a profit center, a manager is treated as an entrepreneur. Typically, a profit center manager is given decision-making power and is held responsible for the profits generated by her center. 2. 2.1 Advantages and Disadvantages of Decentralization Advantages • Decisions are better and more timely because of the manager’s proximity to local conditions. • Top managers are not distracted...
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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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...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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...Q3: Discuss the concepts of Financial Decision Measures, responsibility accounting, Profit & Investment centers, and highlighting examples relevant to each. • Financial Decision Measures Financial Decisions Financial Decisions are decisions that involve: (1) Determining the proper amount of funds to employ in a firm (2) Selecting projects and capital expenditure analysis (3) Sourcing funds on the most favorable terms possible (4) Managing working capital such as inventory and accounts receivable. Financial Decision Measures There are three fundamental concepts that underlie the process of making many financial decisions. They are also the three fundamental concepts that determine the economic value of any project, investment, or business organization. The three concepts are; a) Time Value of Money b) Risk-Return Relationship c) Cash Flows • Responsibility accounting This is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. The objective is to assist in the planning and control of a company’s responsibility centers—such as decentralized departments and divisions. These parts, or segments are referred to as responsibility centers that include: a) Revenue centers b) Cost centers c) Profit centers d)...
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...Accounting 1 Session 1, 2011 Tutorial Week 8 - Transfer pricing Tutorial Questions Overall Theme In previous weeks we have focused our attention on the use of management accounting information for costing purposes (e.g. ABC), processes improvement (e.g. ABM, process analysis), and for budget control (standard cost analysis). This week we switch our attention to another aspect of management accounting by exploring the concept of responsibility accounting. We look at how management accounting system can be designed to encourage desirable (goal-congruent) managerial behaviour and to reflect the autonomous nature of contemporary, de-centralised organisations. In particular, we examine two control mechanisms used in conjunction with the responsibility accounting system, namely, transfer pricing. We will consider how managers determine transfer prices, rationales behind these systems, their benefits and limitations. Along the way we will also consider the impact of interdependencies and why variability can play havoc on management accounting systems. Desired Learning Outcomes and Essential Reading Mowen et. al. (2010): • Chapter 10: p368-374 • Chapter 13: p508-513; p523-535. TOPIC 6 TRANSFER PRICING After completing this topic, you should be able to: • • • • Explain the benefits and costs of decentralisation Explain the benefits of transfer pricing systems Understand the differences between the types of responsibility accounting systems Determine transfer prices using various methods, including:...
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...SOAL LATIHAN TRANSFER PRICING SOAL 1: PT PARAHYANGAN INDUSTRYmemilikibeberapadivisiusahanyadansalahsatunyaadalahdivisiA yang khususmemproduksiproduk spare part denganmerk ‘PLAZO’ yang selamainidijualkepasareksternal. Padaawaltahun 2008, PT PARAHYANGAN INDUSTRY membentuk 1 divisibarulagiyaitudivisi F untukmemproduksiproduk ‘METAZO’, danuntukmenghasilkanproduk METAZO inijugadiperlukan spare part seperti yang dihasilkanolehdivisi A. Divisi F jugamendapatkanpenawarandaripihakluaruntukmembeliproduk spare part tsb yang samaseperti yang dihasilkanolehdivisi A. Di bawahinibeberapa data produksidan data lainnyadaridivisiA, sbb: * Kapasitasproduksi normal setahununtukproduk PLAZO adalah 250.000 unit, dansampaisaatinidivisi A barudapatmenggunakankapasitasproduksinyasebesar 75% darikapasitas yang ada, danseluruhproduk yang diproduksidapatterjualkepasareksternaldenganharga per unit Rp. 31.000. * Biayaproduksiuntukmembuat spare part PLAZO adalahsbb: * BahanlangsungRp. 1.350.000.000. * UpahlangsungRp. 768.750.000.000. * Variable conversion cost Rp.1.425.000.000. * Manufacturing Overhead cost Rp. 1.856.250.000. * Biaya Variable SGA per unit Rp. 3.200, dari jumlah mana sebanyak 30% dapat dihindarkan apabila terjadi internal sales antar divisi. * Biaya Fixed SGA per tahun sebesar Rp. 824.031.250, dimana 35% merupakan sunk cost. Divisi F bisa membeliprodukspare part tsb dari supplier luardenganhargaRp. 28.500/unit. Pertanyaan : a) Hitunglah di antara harga...
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...TRANSFER PRICING Pengertian : A transfer price is what one segment of company charges another segment of the same company for the transfer of good or service. The segment may be subsidiaries, departments, branches, or any other part of the overall multinational organization. Secara umum transfer pricing merupakan jumlah harga atas penyerahan barang atau imbalan atas penyerahan jasa yang telah disepakati oleh kedua belah pihak dalam transakasi bisnis financial maupun transaksi lainnya. Dalam suatu grup perusahaan, transfer pricing (sering disebut dengan istilah intercompany pricing, intercorporate pricing, interdivisional pricing atau internal pricing) Secara komersial terdapat beberapa dasar penentuan harga transfer yaitu : a. Cost basis b. Market basis c. Negosiasi d. Arbitrasi e. Ganda Harga transfer yang mendasarkan pada biaya bisa berupa : • Actual variable cost • Actual fixed cost • Standard variable cost • Standard full cost • Average cost • Full cost plus mark up Sehubungan dengan harga transfer, terdapat beberapa ketentuan dalam UU PPh yang mengatur tentang perlakuan harga (pasal 10 (1), pasal 6 (1) dan pasal 18). Implikasi Pajak Transfer pricing dapat melibatkan baik transaksi domestic maupun global. Dari aspek pajak penghasilan, transfer pricing domestic tidak membawa implikasi yang signifikan karena potensi penghasilan kena pajaknya (walau digeser dari satu ke lain badan) masih berada dalam...
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...Internationale Besteuerung Seminararbeit Transfer Pricing in multinationalen Unternehmen Eine integrierte Management- und steuerliche Sicht Sommersemester 2013, 2. Fachsemester Seminarleiter: Prof. Dr. Wolfram F. Richter Betreuer: Dr. Lars Kunze Eingereicht von: Xu, Chen Matrikel-Nr.: 161276 Anschrift: Bunsenstrasse 17, 45145 Essen Telefonnummer: 0176 64736605 E-Mail: chen.xu@tu-dortmund.de Inhaltsverzeichnis 1 Einleitung ................................................................................................................. 2 1.1 Problemstellung und Zielsetzung ....................................................................... 2 1.2 Aufbau der Arbeit .............................................................................................. 2 2 Grundlagen des Verrechnungspreises ................................................................... 2 2.1 Wesentliche Grundbegriffe zur Analyse des Verrechnungspreises ................... 2 2.2 Funktion und Ziele des Verrechnungspreises .................................................... 3 2.2.1 Funktion aus der Management-Accounting-Sicht ................................ 3 2.2.2 Funktion aus steuerlicher Sicht ............................................................ 4 2.3 „One Set or two Sets of Books“ ......................................................................... 4 3 Methoden zur Ermittlung angemessener Verrechnungspreise ........................
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...Corporate Governance – The Evolution Concerned with the mechanisms by which owners have some form of control over managers. The Combined Code was introduced based on the recommendations of the following reports: The Cadbury Report 1992 Recommended a ‘Code of Best Practice’ This was a voluntary code and its main proposals were related to: The composition of company boards The length of directors contracts Disclosure of remuneration packages Auditing matters Greenbury Report 1995 Reinforced the ‘Code of Best Practice’ recommended by Cadbury and made further recommendations regarding matters relating to directors’ remuneration. Hampel Report 1998 ‘Fine tuned’ the above reports. In particular, the points that: The roles of Chairman and Chief Executive should be separate Directors’ contracts should be for one year or less Remuneration committee should be made up of independent non-executive directors Non-executive directors may be paid in company shares although this not recommended A senior non-executive director should be nominated to deal with shareholders’ concerns Directors should be trained The Code proposes principles and code provisions under five headings: Directors Directors’ remuneration Relations with shareholders Accountability and audit Institutional shareholders Further guidance on accountability and audit is contained in the Turnbull Committee Report (1999) ‘Internal Control: Guidance for Directors of Listed Companies incorporated...
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...Generally speaking, cost-based transfer pricing is top management chooses a transfer price based on the costs of producing the intermediate product. For instance, variable production costs, variable and fixed production costs, full costs (including life-cycling costs) as well as some markup. It is useful when market prices are unavailable or too costly to obtain. When a large organisation transfers product across international borders, transfer prices are relevant in the calculation of income taxes, and are sometimes relevant in connection with other international trade and regulatory issues (Horngren, Datar, Foster, Rajan, Lttner, 2009). When transfer prices are based on full cost plus a markup, it may probaly lead to sub-optimal decisions. Since it causes the buying division to regard the fixed costs and the markup of the selling division as a variable cost. Indeed, the buying division may then purchase products from an external supplier expecting savings in costs that will not exist (Horngren, et al, 2009). In a large company, the transfer price is a major factor between manufacturing and distribution divisions. In order to achieve company profit maximization when decentralized segments of a company interact, a transfer pricing system should be established that treats supplying segments as variable cost recovery centers and setup costs are treated as a variable function of run size. This induces optimal run sizing decisions by the producing and purchasing divisions. ...
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