Accg326
CHAPTER 11
INTERNATIONAL TRANSFER PRICING
Chapter Outline
I. Two factors heavily influence the manner in which international transfer prices are determined: (a) corporate objectives, and (b) national tax laws. There are a variety of cost, especially tax, minimization objectives that MNCs might attempt to achieve through international transfer pricing. However, MNCs must be careful to comply with national tax laws in setting international transfer prices.
II. The three bases commonly used for establishing transfer prices, both for domestic and international transactions, are: (1) cost-based transfer prices, (2) market-based transfer prices, and (3) negotiated prices. Theory suggests that different pricing methods are appropriate in different situations.
III. There are two types of objectives to consider in determining international transfer prices: (a) performance evaluation and (b) cost minimization. A. Transfer prices affect the reported profit of both parties to an intercompany transaction; revenue for the seller and an expense for the buyer. To fairly evaluate performance, transfer prices should be acceptable to both the buyer and the seller, otherwise dysfunctional behavior can occur. B. Cost minimization objectives can be achieved by top management using discretionary transfer pricing. Possible objectives include minimization of worldwide income tax, minimization of import duties, circumvention of repatriation restrictions, and improving the competitive position of foreign subsidiaries. C. The objectives of establishing transfer prices to form a basis for fair evaluation of performance and at the same time minimize one or more types of cost through discretionary transfer pricing often conflict with one another.
IV. National tax authorities have guidelines regarding what is an acceptable transfer price for tax purposes. These national laws often are based on OECD guidelines. The basic rule is that intercompany
INTERNATIONAL TRANSFER PRICING
Chapter Outline
I. Two factors heavily influence the manner in which international transfer prices are determined: (a) corporate objectives, and (b) national tax laws. There are a variety of cost, especially tax, minimization objectives that MNCs might attempt to achieve through international transfer pricing. However, MNCs must be careful to comply with national tax laws in setting international transfer prices.
II. The three bases commonly used for establishing transfer prices, both for domestic and international transactions, are: (1) cost-based transfer prices, (2) market-based transfer prices, and (3) negotiated prices. Theory suggests that different pricing methods are appropriate in different situations.
III. There are two types of objectives to consider in determining international transfer prices: (a) performance evaluation and (b) cost minimization. A. Transfer prices affect the reported profit of both parties to an intercompany transaction; revenue for the seller and an expense for the buyer. To fairly evaluate performance, transfer prices should be acceptable to both the buyer and the seller, otherwise dysfunctional behavior can occur. B. Cost minimization objectives can be achieved by top management using discretionary transfer pricing. Possible objectives include minimization of worldwide income tax, minimization of import duties, circumvention of repatriation restrictions, and improving the competitive position of foreign subsidiaries. C. The objectives of establishing transfer prices to form a basis for fair evaluation of performance and at the same time minimize one or more types of cost through discretionary transfer pricing often conflict with one another.
IV. National tax authorities have guidelines regarding what is an acceptable transfer price for tax purposes. These national laws often are based on OECD guidelines. The basic rule is that intercompany