Transfer Pricing

Question: Discuss about theTransfer Pricing. Answer: Introduction: The application of transfer prices is huge. The structures of the corporations has become complex in nature. Moreover, the departments are broad that adds to the complexity. This leads to immense competition in terms of departments that are non-profitable and integrated to the society. Transfer pricing is utilize to know the genuine transaction price that happens between two units that are related and projects the profitability, as well as possibility for enhancement (Emmanuel Mehafdi, 1994). Transfer pricing can be tag as one of the vital problem in international taxation. It happens when two companies from the same group of multinational trade with each other. When a corporation produces goods of various type at the same time then it becomes difficult to notice the extent of profit contributed to the overall profitability of the corporation. Moreover, the ability of every department to compete can be tough when it comes to comparison with the external companies. When it comes to b ig firms, there is a presence of market that is internally and information derives through clients by way of transfer prices. For example, when a subsidiary of Coca-Cola (US based) have a trade with the French-based subsidiary and comes upon a price then it is termed as transfer pricing. Transfer pricing is not wrong or illegal in nature, but the main problem is the mispricing also known by the name of transfer mispricing. Transfer price is utilized when the goods of one company is sold to the same company not located in different jurisdictions. Such a transfer pricing is common and 70% goods sold in such a manner (Vanderbeck, 2013). When it comes to multinational point of view, it can be said that the transfer pricing has its own advantages but with the passage of time, there is a strong alert of tax avoidance. When transfer pricing happens company can book profit related to goods and services to another country having lower tax rate (Avery, 1996). On the other hand, in many cases, the transaction permits a company to keep the tariffs at bay. The Main Types of Transfer Pricing are: Negotiated transfer prices This transfer pricing enables to have a track of the purchasing ways and put strong attention on the challenging nature of the company. This form of transfer pricing is important in the way that is helps both the companies to reach a price by negotiation without keeping it aloof from the prices of the market. Cost-based transfer price According to Adam Graham (1999) when there is unavailability of the information that links to the eternal market prices then the company vouches for cost-based transfer pricing. The major utility of this type of transfer pricing is that it draws the incentives of the manager and leads to attainment of the corporate goals. Further, it includes the opportunities that are available in the market. Market-based transfer price this type of transfer pricing happens when an external market is available for the product. This transfer price helps in eliminating the issue that is present between the buying and selling division (Adam Graham, 1999). References Adam C Graham P 1999, Transfer Pricing: A UK Perspective, Butterworths London: Edinburgh Dublin. Avery J.J 1996, Tax law: rules or principles?, Fiscal Studies, vol. 17, no. 3, pp. 63-89 Emmanuel, C. R and Mehafdi, M 1994, Transfer Pricing, Academic Press Harcourt Brace and Company, Publishers. Vanderbeck, E J 2013, Principles of Cost Accounting, Oxford university press