transfer pricing
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CMA/JKBS/April'15 1
CMA/JKBS/April'15 2
Cost and ManagementAccounting
Submitted To : Prof. Supriya Sehgal
CMA/JKBS/April'15 3
TOPIC :
Transfer Pricing
Submitted By : Gunjan Singh Prashant Sahoo Jaya Chaddha Monika Sharma Kapil Jain
CMA/JKBS/April'15 4
Shall Cover :
Definition
Criteria
Objectives
Purpose
Methods
CMA/JKBS/April'15 5
Cont…Use
Factors Affecting
Advantages
Disadvantages
CMA/JKBS/April'15 6
Definition :
Transfer pricing is the setting of the price for
goods and services sold between controlled (or
related) legal entities within an enterprise.
Example :- If a subsidiary company sells goods to a
parent company, the cost of those goods is the
transfer price.
CMA/JKBS/April'15 7
Criteria :• Tax regimes
• Local Market conditions
• Market Imperfections
• Joint-venture partner
CMA/JKBS/April'15 8
Objectives :Goal congruence
Performance appraisal
Divisional autonomy
Simple and easy
It should provide each segment with the relevant
information required to determine the optimum
trade-off between company costs and revenues
CMA/JKBS/April'15 9
Purpose :
Multinational companies use transfer pricing to
minimize their worldwide taxes, duties, and tariffs.
CMA/JKBS/April'15 10
METHODS:-
MARKET
BASED COSTBASED
NEGOTIATED
CMA/JKBS/April'15 11
Market-based Transfer Price
It is best if :
Perfectly Competitive Market
Interdependence of Subunit is Minima.
No additional Cost-benefits to company.
CMA/JKBS/April'15 12
Drawbacks :The major drawback to market-based
prices is that market prices are not always
available for items transferred internally.
CMA/JKBS/April'15 13
Cost-based Transfer Price :About more then half of the major companies in the
world transfer items at cost.
CMA/JKBS/April'15 14
Cost Factors :
• Full cost
• Variable cost
• Dual pricing
CMA/JKBS/April'15 15
Negotiated Transfer Pricing :
Companies heavily committed to segment
autonomy often allow managers to
negotiate transfer prices.
CMA/JKBS/April'15 16
Use of Transfer Pricing :• Price setting for services performed by business unit.
• A mean of evaluating financial performance of
business unit.
• Determining the contribution to net profit by centres
in organisation.
CMA/JKBS/April'15 17
Cont….Reduce in corporate taxes paid.
Reduce in VAT, excise, Tariffs.
CMA/JKBS/April'15 18
Factors Affecting :Performance measurement.
Capability of accounting system
Custom duties
VAT
Taxes on profit
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Advantages :Over results.
Decisions are better and more timely because of the
manager’s proximity to local conditions.
Top managers are not distracted by routine, local decision
problems.
Managers’ motivation increases because they have more
control
CMA/JKBS/April'15 20
Disadvantages : Lack of goal congruence among managers in di erent ff
parts of the organization.
Insu cient information available to top management.ffi
increased costs of obtaining detailed information.
Lack of coordination among managers in di erent ff
parts of the organization.
CMA/JKBS/April'15 21
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