International Aspects of Transfer Pricing:
The objective of transfer pricing change when
multinational corporations involved and the goods and services being
transferred cross international borders.
The objectives of international
transfer pricing, as compared to domestic transfer pricing are summarized
below:
|
Transfer Pricing
Objectives |
|
Domestic
- Greater divisional autonomy
- Greater motivation for managers
- Better performance evaluation
- Better goal congruence
|
International
- Less taxes, duties and tariffs
- Less foreign exchange risks
- Better competitive position
- Better governmental relations
|
The objective of international transfer
pricing focus on minimizing taxes, duties, and foreign exchange risks,
along with enhancing a company's competitive position and improving its
relations with foreign governments. Although domestic objectives such as
managerial motivation and divisional autonomy are always important, they
often become secondary when international transfers are involved.
Companies will focus instead on charging a transfer price that will slash
its total tax bill or that will strengthen a foreign subsidiary.
For example, charging a low transfer price
for parts shipped to a foreign subsidiary may reduce customs duty
payments as the parts cross international borders or it may help the
subsidiary to compete in foreign markets by keeping the subsidiary's
costs low. On the other hand, charging charging a high transfer price may
help a multinational corporation draw profits out of a country that has
stringent controls on foreign remittances, or it may allow a
multinational corporation to shift income from a country that has high
income tax rates to a country that has low rates. |
