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15 Cards in this Set

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  • Back
What is transfer pricing?
The determination of the price at which transactions between related parties will be carried out. Transfers can be from subsidiary to parent or parent to subsidiary. They are also known as intercompany transactions.
What are the types of intercompany transactions and their associated price?
1. Sale of tangible property - Sales Price
2. Use of trangible property - Rental or lease payment
3. Use of intangible property - Royalty, licensing fee
4. Intercompany services - Service charge/management fee
5. Intercompany loans - Interest rate
Why do companies use transfer pricing?
-It may improve the allocation of corporate resources within the firm
-It may facilitate the evaluation of divisional performance
-Required by Laws & GAAP if the divisions involved are different legal entities
What are the objectives of a sound transfer pricing system?
-Goal congruence
-Performance evaluation
-Autonomy
-Cost Minimization
--Avoidance of Withholding taxes
--Minimization of Import Duties
--Circumvent profit repatriation restrictions
--Protect cash flows from currency devaluation
--Improve competitive position of foreign operation
What are the 3 methods of transfer pricing?
1. Cost-based transfer price (variable production cost, variable plus fixed production cost, or full cost)
2. Market-based transfer price
3. Negotiated price
What are common transfer pricing problems - internal?
-There is no "best" transfer price that can help achieve all corporate objectives
-Pricing disputes among the divisions may be difficult to resolve
-Problems in cost allocation among products and services when joint costs are involved
What are common transfer pricing problems - External?
-The rules and regulations in some countries are not clearly defined.
-Arm's length prices for some intermediate products may be difficult to define
-Long and costly litigation may follow if a transfer price dispute cannot be settled between the company and the tax authorities
-The problem of double taxation in two or more countries
What are government reactions to transfer pricing?
-Governments are aware of risk that multinationals will use transfer pricing to avoid paying income and other taxes
-Most governments publish guidelines regarding acceptable transfer pricing.
-The guidelines typically use the notion of an arm's-length price.
-Arm's length price is the price that would be agreed upon by unrelated parties.
Name the 5 methods to determine arm's length price in a sale of tangible property
1. Comparable uncontrolled price method
2. Resale price method
3. Cost-plus method
4. Comparable profits method
5. Profit split method
Describe the Comparable uncontrolled price method used to determine the transfer price for a sale of tangible property.
-Transfer price is determined based on reference to the company's sales of the same product to an unrelated buyer.
Describe the resale price method used for determining transfer price?
-Generally used when the affiliate is a sales subsidiary and simply distributes finished goods.
-Transfer price is determined by deducting gross profit from the price charged by the sales subsidiary.
-Gross profit is determined by reference to uncontrolled parties.
Describe the cost-plus method used to determine the transfer price
-Transfer price is determined by adding gross profits to the cost of production.
Describe the comparable profits method to determine transfer price
-Transfer price is determined via reference to an objective measure of profit of an uncontrolled company involved in comparable transactions.
Describe the Profit split method to determine transfer price.
-Treats the two related parties as one unit.
-Profit from the eventual sale to an uncontrolled party is allocated between the related parties.
-Allocation is based on relative contribution of each party.
Talk about Advance Pricing Agreements
-An APA is an agreement between a company and a taxing authority.
-Primary advantage is assurance that their approach will not be challenged.
The primary disadvantage is the time and cost involved in arriving at the agreement.