Professional Documents
Culture Documents
|
|
| |!
" #
$#
%
&
()
|
|
|
()
|
()
|
' $
V
*
#
V
|
The objectives of transfer pricing are as follows:
Maximizing overall after-tax profits
Reducing incident of customs duty payments
Circumventing the quota restrictions (in value
terms) on imports
Reducing exchange exposure, circumventing
exchange controls, and restricting profit
repatriation so that transfer firms¶ affiliates to
the parent can be maximized
Transferring of funds in locations so as to suit
corporate working capital policies
µWindow dressing¶ operations to improve the
apparent (i.e., reported) financial position of an
affiliate so as to enhance its credit ratings.
The objective of transfer price apparently seems
simple allocation of profits among the subsidiaries
and the parent company, but the differences in the
taxation patterns in various markets makes it a
complex phenomenon
Transfer prices come under the scrutiny of taxation
authorities when it is different from the arm¶s length
price to unrelated parties
Transfer pricing involves the following stake-holders:
Parent company
Foreign subsidiary or joint venture or any
other strategic alliance
Strategic alliance partners
Home country and overseas managers
Home country governments
Host country government
International transactions based on intra-company
transfer pricing involves conflicting interests of
various stake-holders
Therefore, in view of the diverse interests of
stake-holders, transfer-pricing decisions become a
formidable task
The factors influencing transfer pricing include:
Market conditions in the foreign country
Competition in the foreign country
Reasonable profit for the foreign affiliate
Home country income taxes
Economic conditions in the foreign country
Import restrictions
Customs duties
Price controls
Taxation in the host country, e.g., withholding
taxes
Exchange controls, e.g., repatriation of
profits.
V
V
|
)
+ It is referred to
as arm¶s length pricing, wherein the sales
transactions occur between the two unrelated
(arm¶s length) parties
Arm¶s length pricing is preferred by taxation
authorities
Transfer pricing comes under the scrutiny of tax
authorities when it is different from the arm¶s length
price to unrelated firms.
,(
+ Pricing policies that deviate
from market-based arm¶s length pricing are known
as non-marketing based pricing.
|
+
It refers to the intra-firm transactions that
take palace at the marketing cost.
A number of transnational corporations have re-
invoicing centres at low tax countries (popularly
known as tax heavens), such as, Jamaica,
Cayman Islands, Bahamas, etc. to co-ordinate
transfer pricing around the world
These re-invoicing centres are used to carry out
intra-corporate transactions between two affiliates
of the same parent company or between the
parent and the affiliate companies
These re-invoicing centres take title of the goods
sold by the selling unit and re-sell it to the
receiving units
The prices charged to the buyer and the prices
received by the seller are determined so as to
achieve the transfer pricing objectives
In such cases, the actual shipments of goods take
place from the seller to the buyer while the two-
stages transfer is shown only in documentation
The basic objective of such transfer pricing is to
siphon profits away from a high-tax parent
company or its affiliate to low-tax affiliates and
allocate funds to locations with strong currencies
and virtually no exchange controls.