Global Market and Transfer Pricing Challenges

Sunday, February 5th, 2012 - Accounting

Global Market and Transfer Pricing ChallengesGlobal Market and Transfer Pricing Challenges

In the bygone thirty dotage, the point of transfer pricing has been elevated in tenor for the interest keep from the accelerated globalization of today ‘ s employment stage. Wider businesses than almighty are establishing international divisions and transferring wares, services, and intangible assets between them. This article reviews the basics of transfer pricing and examines completed examples some of the challenges inherent in its trial. Global Market and Transfer Pricing Challenges

Transfer pricing is the price for goods and services that is discomposed to one division of a company from new division for the hope of rating profit and loss for each seeing accurately since possible. The basic threat is to effect that one division does not unfairly boon from the transaction over the other by incorrect big idea of these charges. ) The conceit used to assess this amount is based on the ” arms – hank principle “. This principle states that a concern charge base its price on the equivalent rate it would charge an unrelated splurge for the product, matching whereas a customer. This burden be calculated relatively succulent if the division sells the same product to others, or has access to info on pricing of kin produce. Heavier theory that exigency be adhered to when classifying the proper transfer price is called the ” bad rote ” principle. Transfer pricing has elaborate methods that incubus be utilized and a house is expected to value the most appropriate for receipt the most precise impact. ( Benke and Edwards 10 ) A few examples of variant methods:

Comparable Profits / Transactional Net Marginal

Cost Good thing / Resale Price

Comparable Everyday Price

Services Cost

Profit Split

Usually, a homely burden hole up no foreign divisions faces fewer challenges when dealing hide transfer pricing. An standard:

An electronics organization produces a television using parts acquired from a practicable in the twin country. The field occasion protect that the suitable does not charge vitally much or radically babyish for the particle, thence preventing the transfer price to strikingly access profit of one division over the other. Global Market and Transfer Pricing Challenges

Global Market and Transfer Pricing Challenges

The tax implications to each division are scant, thanks to the thing will be assessed for impost purposes subservient the alike rules of the host country. This citation blame turn into augmented multiform if the services, wares, or intangible assets transferred are not biased at arms roll and keep no relative comparisons available.

When dealing shelter transfer pricing in an international setting, additional challenges can occur. An example:

An electronics company in the United States produces televisions using parts that it acquires from a division in Korea and builds these products in a plant in China owned by another division. It then ships the television to the Europe for sale at a retailer that is another separate division. In the chain, the electronics company has four separate divisions that have to show a profit or loss, in different countries.

The addition of the three governing bodies can add the following challenges when assessing the proper transfer price, beyond the complexity of items with no relative comparison:

Potential for double taxation – When dealing with multiple governing bodies, taxation authorities may have different rules for apply the best method concept. In the example, the United States may prefer Transactional Net Margin method for the parts used in Korea when reporting, while Korea may require Cost Plus method when reporting. This disparity could occur between all four tax authorities leaving the possibility of additional taxes assessed versus the use of one method for all countries.

Inability to accurately anticipate tax burden – Even when the arms length and best method principles are applied to the best of a corporation ‘ s ability, many taxing authorities reserve the right to require restatement of transfer pricing. This can create an environment of uncertainty as to financial results when the taxing authority can require this.
Additional costs associated with reporting – When assessing transfer pricing, requirements of accuracy and methodology choices can add an additional cost for lawyers, and accountants in order to prepare the analysis required. In addition, taxing authorities reporting rules may require written in depth analysis for each transfer pricing decision.

These are merely three examples of the challenges facing a corporation when dealing with transfer pricing on a global scale. There can be other challenges as well in the political and social arenas, such as public perception of unethical use of transfer pricing to benefit profitability, which have different non – monetary ramifications to the modern multinational. Global Market and Transfer Pricing Challenges

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