International Aspects of Transfer Pricing:
The objective of transfer pricing change when multinational corporations involved and the goods and services being transferred cross international borders.
The objectives of international transfer pricing, as compared to domestic transfer pricing are summarized below:
Transfer Pricing Objectives
- Greater divisional autonomy
- Greater motivation for managers
- Better performance evaluation
- Better goal congruence
- Less taxes, duties and tariffs
- Less foreign exchange risks
- Better competitive position
- Better governmental relations
The objective of international transfer pricing focus on minimizing taxes, duties, and foreign exchange risks, along with enhancing a company’s competitive position and improving its relations with foreign governments. Although domestic objectives such as managerial motivation and divisional autonomy are always important, they often become secondary when international transfers are involved. Companies will focus instead on charging a transfer price that will slash its total tax bill or that will strengthen a foreign subsidiary.
For example, charging a low transfer price for parts shipped to a foreign subsidiary may reduce customs duty payments as the parts cross international borders or it may help the subsidiary to compete in foreign markets by keeping the subsidiary’s costs low. On the other hand, charging charging a high transfer price may help a multinational corporation draw profits out of a country that has stringent controls on foreign remittances, or it may allow a multinational corporation to shift income from a country that has high income tax rates to a country that has low rates.
You may also be interested in other articles from “decentralization, segment reporting and transfer pricing” chapter:
- Decentralization in organizations
- Traceable and common fixed costs
- Segment reporting and profitability analysis-segmented income statements
- Hindrances/Problems to Proper Cost Assignment in Segmented Reporting
- Segmented Financial Information on External Reports
- Return on Investment (ROI) for Measuring Managerial Performance
- Controlling and Improving Rate of Return on Investment
- Return on Investment (ROI) and Balanced Scorecard
- Criticism, Disadvantages or Limitations of Return on Investment (ROI)
- Residual Income-Another Method to Measure Managerial Performance
- Limitations, Criticism or Disadvantage of Residual Income Method
- Allow the managers involved in the transfer to negotiate their own transfer price (negotiated transfer pricing).
- Set transfer prices at cost using variable or full (absorption) cost
- Set transfer prices at the market price
- Divisional Autonomy and Sub optimization
- International Aspects of Transfer Pricing
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