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TRANSFER PRICING IN MNCs

TRANSFER PRICING IN MNCs. Prepared by: Sherin Joy. What is Transfer Pricing?. “ Transfer pricing is the price charged by one business unit for the products & services transferred to another business unit of the same company to calculate the profit & loss of each division separately .”.

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TRANSFER PRICING IN MNCs

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  1. TRANSFER PRICING IN MNCs Prepared by: Sherin Joy

  2. What is Transfer Pricing? “Transfer pricing is the price charged by one business unit for the products & services transferred to another business unit of the same company to calculate the profit & loss of each division separately.”

  3. Why organizations go for Transfer Pricing? • Reasons: • Differences in corporate tax rates • Restriction on profit repatriation transferred from patent country • High customs duty

  4. Growing importance of Transfer Pricing • Acquisition of huge economic power • Liberalization • Government moving away from control of productive resources

  5. METHODS

  6. Comparable Uncontrolled Price Method (CUP) • Described as most likely to result in an accurate of an arm’s length price • Comparison between: controlled transaction and independent transaction • Appropriate for fungible property

  7. Example • A Co. sells spares to B Co, a related party. It also sells spares to C Co., an unrelated party, for $100. • Under CUP, A Co. would charge B Co. $100 (with possible adjustments for differences in shipping costs, etc.).

  8. Resale Price Method • Arm’s length price of a controlled sale is equal to the applicable resale price less an appropriate mark-up • Contrast to CUP method

  9. Example • A Co. sells spares to B Co., a related party, and B Co. sells them to unrelated retail customers for $200 each. • Distributers in a similar line of business usually earn 20 percent of the sales price. • Under the retail sales method, the price on the sale from A Co. to B Co. would be $160 ($200 – (20% of $200)).

  10. Cost Plus Method (CPM) • When a manufacturer sells its product to a related party or when a related buyer adds value to the product it has purchased from a related party.

  11. Example • A Co. manufactures spares at a cost of $50, sells them to B Co., a related party, and B Co. sells them to unrelated retail customers for $200. • Contract manufacturers in similar lines of business typically earn a gross profit of 30%. • Under the cost-plus method, the price on the sale from A Co. to B Co. is $65 ($50 + (30% of $50)).

  12. Profit Split Method (PSM) • It evaluates whether the allocation of the combined operating profit or loss attributable to one or more controlled transactions is arm’s length

  13. Example • A Co. and B Co. are related persons engaged in the production and sale of pharmaceuticals. • A Co. engages in lots of R&D to produce its pills. • B Co. sells the pills after affixing its valuable trade name to the packaging. • They earn profits of $8 million from the common enterprise.

  14. Transactional Net Margin Method (TNMM) • Here, the arm’s length price is arrived by determining the net profit margin made from the controlled transaction • Comparison between operating profit for the inventory purchased

  15. THANK YOU..

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