Transfer Pricing, Outline Example

Introduction

1. Transfer pricing simply refers to the setting, evaluation and adjustment of charges which are made in relation to the particular type of related goods or services.
2. Transfer prices may be used to reflect the efficient allocation of resources that could be used for other purposes.
3. These types of prices are very significant for taxpayers and even tax administrators since they can be used to determine expenses and income, and therefore leading to determination of taxable profit of different enterprises in various tax jurisdictions.
4. More than 50 governments have adopted the policy of transfer pricing principles. They are normally referred to as ‘arms length principle’.
5. This typically means evaluation of transfer prices which based on the pricing evaluation in various transactions involving more than two parties which are not related in any way in arms length.

General principles of transfer pricing and taxation

1. Tax regulations normally allow parties which are related to each other to set prices in a way that they will opt to use but the adjustments of the same prices should be guided by the guidelines.
2. Though they vary from country to country, the way they appeal the taxpayer of those respective countries do also vary.

Motivations of transfer pricing

1. Besides corporate tax differential which appeals the organizations to have transfer pricing, there are also other factors which have attracted them to the pricing concept. These include

High custom duty– hence resulting to under invoicing of goods

Great restrictions on repatriation of profits– which have lead to the over invoicing of raw materials

Ownership restrictions– ownership restrictions leads to less returns on technology which is invested in MNES or JV.

Implications of transfer pricing

1. First transfer pricing is important due to the reduction of tax burden and customs tax. These may be an advantage to companies or enterprises but it is a disadvantage to the government in the sense that it will lead to loss of customs and tax revenues. This may prompt the government to over tax the population so as to meet the expenditure.
2. Transfer pricing has lead to the distortion of balance of payment between the home country and the foreign country. This have adversely affected the sovereignty of nations given the large sizes of some firms
3. The other implication of transfer pricing is that since the companies wants to maximize profits, the multinational enterprises will have to   open up subsidiary companies in places where production is very profitable and in which the tax burden is lower.
4. This affects the level of foreign direct investment. The linkage itself is so strong that some economies have never had controls of transfer pricing hence making themselves as the leading destinations of FDI.

Transfer pricing adjustments

1. Prior to understanding the implications and the benefits of transfer pricing, it is important to understand the regulations which have been made in order to streamline the effects of transfer pricing.
2. There have been regulations of ensuring that prices have been checked between the parties involved in a particular transaction so that the policies pertaining transfer pricing have been followed.
3. To determine the transfer prices several methods have to be used which include transaction net margin method, resale price method, cost plus method, comparable uncontrolled price method and other vital methods.
4. As such, research have shown that the respective methods of determining the transfer prices will affect the tax policy of a particular country and how companies will deal with corporate taxation

Conclusion

1. Transfer pricing is very important in the manner in which the global economy is being steered. Since the sourcing and consuming destinations are different, it is important that transfer pricing be understood well so that the companies or multinational enterprises are able to handle the concept.
2. Countries need to achieve the balance between the revenue loss and attracting foreign direct investment through enhancing flexibility of transfer pricing. Going to extremes is fit for low tax country.