Transfer

Pricing
Accounting For Managers
ACC 7201
 ABOUT US
A. H. Aktaruzzaman - 2223032005
Tazbir Mahmud - 2223032009
Md. Bengir Ahmed - 2223032028
Sameul Hasan - 2223032041
Sadman Sakib - 2223032045
Khandaker Jamiul Hasan - 2223032049
 TABLE OF CONTENTS

01 02 03
Intrduction Key Concept Method & Classification

04 05 06
Regulatory Complience Global Adopting TP in
Experience Bangladesh
What is transfer pricing?
The determination of prices at which goods, services and
intangible properties are transacted between related parties

Transfer Pricing

Selling goods,
rendering services, Determination
granting right to use of price
intangibles etc.

Transactions between Related Parties

 Transfer pricing (regular situation)
ABC Global

China Bangladesh

Sales 300 Sales 600

Cost and expense 200 Purchase 300

Profit 100 Expense 100

Tax 10% 10 Profit 200

Tax 37% 75

Combined tax for ABC: 10 + 75 = 85

 Transfer pricing (situation - 1)
ABC Global

China Bangladesh

Sales 400 Sales 600

Cost and expense 200 Purchase 400

Profit 200 Expense 100

Tax 10% 20 Profit 100

Tax 37% 37.5

Combined tax for ABC: 20 + 37.5 = 57.5

 Transfer pricing (situation - 2)
ABC Global

China Bangladesh

Sales 400 Sales 600

Cost and expense 200-50 Purchase 400

=150
Profit 250 Expense 100
Management expense 50
Tax 10% 25 Profit 50

Tax 37% 18.75

Combined tax for ABC: 25 + 18.75 = 43.75

 Associated Enterprise

• “associated enterprise”, in relation to another enterprise,

means an enterprise which, at any time during the
income year, has the following relationship with the
other enterprise-
•  one enterprise participates, directly or indirectly, or
through one or more intermediaries, in the management
or control or capital of the other enterprise; or
• the same person or persons participate, directly or
indirectly, or through one or more intermediaries, in the
management or control or capital, of both enterprises;
 Arm's Length Transaction

● An arm's length transaction refers to a
business deal in which buyers and
sellers act independently without one
party influencing the other. Arm's length
transactions assert that both parties act
in their own self-interest and are not
subject to pressure from the other
party.
 Arm's Length Transaction

• An arm's length transaction is a business deal that involves

parties who act independently of one another.
• Both parties involved in an arm's length sale usually have no
relationship with each other.
• These types of deals in real estate help ensure that properties
are priced at their fair market value.
• Arm's length transactions can have an effect on financing and
taxes.
• Deals between family members or companies with related
shareholders are not considered arm's length transactions.
 Key Issues - Transfer Pricing

Revenue basis Preferred Customers

Preferred Suppliers
 Revenue Basis

● The Manager of a subsidiary treat its same manner that he

would price of a product sold outside of the company. It
forms part of the revenue of his subsidiary, and is
therefore crucial to the financial performance on which he
is judged
 Preferred Customers

● If the Manager of a subsidiary is given the choice of selling

either to a downstream subsidiary or to outside customers,
then an excessive low transfer price will lead the manager to
sell excessively to outside customers, and to refuse orders
originating from the downstream subsidiary.
 Preferred Suppliers

● If the manager of a downstream subsidiary is given the choice

of buying either from an upstream subsidiary or an outside
suppliers, then an excessively high transfer price will cause the
manager to buy exclusively from outside suppliers, As a result,
the upstream subsidiary may have too much unused capacity,
and will have to cut back on its expenses in order to remain
profitable
 Comparable

Methods: Uncontrolled
Price Method

Resale Price
Other Method
Method

ALP
Methods
Transactional
Cost Plus
Net Margin
Method
Method

Profit Split
Method
Applicability of Methods:
1. Comparable Uncontrolled Price (CUP) method:
Compares the price transferred in the transaction between related parties with price
charged of other independent third parties.

2. Resale Price Method:

Method used to determine ALP on the price which a product purchased from
associated parties or related party is resold to independent third party.

3. Cost Plus Method (CPM):

Applicable when any mark up is added with the associated cost in a controlled
transaction and compare such mark up with other uncontrolled comparable.
Applicability of Methods:

4. Profit Split Method:

Process of splitting of total profit in a related party transaction as per the function
performed, risk assumed, and asset employed. Residual profit is compared with
uncontrolled comparable to determine ALP.

5. Transactional Net Margin Method (TNMM):

When no other method is applicable because of transactional difference, TNMM is
applied to prove the transaction at profit margin level.
 Most Appropriate Transfer Pricing Method
Selection:
Methods Preferred For
• Where an independent enterprise buys or sells products that are identical or
Comparable very similar to those sold in the controlled transaction.
Uncontrolled
Price Method • Where services are rendered that are identical or very similar to those
rendered in the controlled transaction.

Resale Price • A distributor buying purely finished goods from a group company (if no CUP
Method available).

Profit Split • Involving transfer of unique intangibles or in multiple international transactions

Method that cannot be evaluated separately.
 Most Appropriate Transfer Pricing Method
Selection:
Methods Preferred For

• Semi finished goods sold between related parties

• Contract/toll manufacturing agreement
Cost Plus • Long term buy/supply arrangements
Method
• Involving manufacture, assembly or production of tangible products or
services that are sold/provided to Associated Enterprises

Transactional
• Tangible property, intangible property or services.
Net Margin
Method • TNMM is applied to the least complex of the related parties involved in the
controlled transaction.
 Regulatory Issues Regarding TP
Associated Enterprises (AE) is fair and
When the pricing of transaction within
Arm’s Length Price (ALP) there is no problem. However, when
rational, i.e.
transactions are mispriced (i.e. lower /higher than fair market price, Transfer Mispricing
happens. And that Concerns for the tax authority.

Head of Expenses that Could be Mispriced:

1. Intercompany RAW Material Cost

2. Management expense
3. Charge for Intellectual Property or intangible – royalty fees, copyright, TM, Patent,
Brand Name, Franchise
4. Sharing or Allocation of common cost
 Why Mispricing is a Concern for Tax Authorities
BEPS(Base Erosion and Profit Shifting)

BEPS is a Tax avoidance strategy used by MNCs’ where profits are shifted from
jurisdictions that have high taxes to jurisdictions that have low or no taxes so
called tax heaven.

BEPS can be achieved with transfer mispricing that means contracting

between subsidiaries in the different jurisdictions at prices that are not
arms’ length.
 Tax agency’s response to Transfer Mispricing
When tax authority Reject the price and income
finds that the price of
related a related Determine the fair price
party transaction has
deviated from the
fair market price Compute the revised total income
then Tax agency
may: Create additional Tax demand
 Criteria for Setting Transfer Pricing
 Goal Congruence
The transfer prices that are set should enable a harmonization of goals.

 Autonomy
Each center manager should be free to satisfy his own needs at the best possible
price.

 Motivation
Transfer Price should not interfere the processes wherein the buying manager
strives to minimize his costs and selling manager strives to maximize his revenues.

 Performance Evaluation
Transfer prices should enable objective evaluation of profit center results.
Key Drivers behind Transfer Pricing in Foreign Countries

Market Import Economic Customs

Conditions Restrictions Conditions Duties

Exchange
Tax Rates Competition Price Controls
Controls
 ADVANTAGES

Coordination among
Generate Profit Figures
departments

Easier Performance
Resource Allocation
Dvaluation
 ADVANTAGES

Better and more Timely

Increases Motivation
Decisions

Reduces Income Tax

 DRAWBACKS

Additional Costs, Time and

Disagreements
Manpower

Inequality Highly Complicated

 DRAWBACKS

Dysfunctional Behavior Difficult to Estimate

Avoiding Tax
Transfer Pricing:
Global Policy
At present, 75 countries have adopted
transfer pricing regime
 Transfer Pricing in the World

● All developed countries have robust transfer pricing system.

● Most of the Mid-Income Countries (MICs) have adopted.

● A great number of developing countries are entering to this era too.

● In South Asia, India (2001), Sri Lanka (2008) and Bangladesh

(2012) have enacted transfer pricing regulation.
 Transfer Pricing Timeline in Bangladesh

2012 July Transfer pricing provisions incorporated in

income tax laws. (to be effective later on)

2014 February Transfer Pricing Cell (TPC) established

2014 July Transfer pricing provisions made effective

2015 April Transfer Pricing Officer Appointed

 Bangladesh TP Legislation

Determination of income from international transaction

having regard to arm’s length price.

The amount of any income, or expenditure, arising from an

international transaction shall be determined having regard to
the arm’s length price. (S. 107B)

TP Provisions applied only to International Transactions.

 International Transaction

• Transaction with associated enterprise (or

deemed associated enterprise)
• Either or both enterprises must be non-resident
• Includes Cost contribution/sharing arrangement
 Associated Enterprise [S. 107A(2)]

“associated enterprise”, in relation to another enterprise, means an

enterprise which, at any time during the income year, has the
following relationship with the other enterprise-
 Arm’s Length Price [S. 107A(1)]

"arm’s length price" means a price in a transaction, the

conditions (e.g. price, margin or profit split) of which
do not differ from the conditions that would have
prevailed in a comparable uncontrolled transaction
between independent entities carried out under
comparable circumstances.
 Transfer Pricing Compliance requirements in
Bangladesh
Maintenance of Accountant’s Report Statement of
Information International transaction

Documents pertaining International Every person entering

to any international transaction into international
transaction has to be exceeding the transaction, shall furnish
maintained aggregate values of along with return of
3 crore taka require income, a statement of
a report from a CA international
or CMA transactions
 Penal Provisions for non-compliance
SL Grounds of penalty Section Amount of Penalty

1 Failure to maintain or furnish 107 G Max 1% of the value of

information each international
transaction
2 Failure to comply with notice 107 H Max 1% of the value of
each international
transaction
3 Failure to submit statement of 107 HH Max 2% of the value of
international transaction each international
transaction
4 Failure to furnish report from CA 107 I Minimum Ta. 3,00,000/
or CMA
Example
Case A
In above scenario
assuming further that there is selling and distribution expense @ BDT 2 per unit for
outside sale.
In this scenario X could save BDT 2/unit of if the transfer is taken place. So, there
could be some modification to pure market price rule. Here, if the transfer is taken
at BDT 48/ unit (i.e. BDT 50 - BDT 2),
X will not lose any contribution for the units transferred because loss in sales
revenue will be compensated by the savings in selling and distribution expenses.
From the company's point of view as whole BDT 2/unit will be saved on no. of units
transferred.
Therefore, transfer should take place rather than selling outside. However, it may be
negotiated between two departments about the share of BDT 2 saved per unit.
Case B
Division X has idle capacity of 20,000 units and demand from Division Y is
20,000 units also.
Therefore, if transfer is not taken place X will not gain anything. As there will
be no additional fixed cost for production up to 20,000 units, X will be
benefited from transfer at any price above variable costs, being there is no
loss of contribution from existing sales reduction. Therefore, the minimum
transfer price from Division X's point of view will be
= Tk. 30
Division Y will not agree on any price more than market price (BDT 50) and any
price below market price will be savings in purchase cost to it. Therefore,
negotiated pricing methods will be applicable here and the range of prices will
be BDT 30 - BDT 50 within which the two participating divisions can negotiate
so that both divisions get a rational share of benefit.
 Conclusion
Funds transfer pricing (FTP) is a system used to calculate how individual assets and
liabilities contribute to a bank's overall profitability.

When two companies that are part of the same group trade with each other, they
need to establish a price for that transaction.

Multinational companies can manipulate transfer prices in order to shift profits to

low tax regions.

Abusive transfer pricing results in the erosion of tax bases and profit shifting from
countries with high tax rates to those with lower tax rates
Thank You