Want to Know About Transfer Pricing? Check out Our Hybrid Transfer Prices Manuals
One of the most important aspects of international firm and its business association is transfer pricing. Transfer pricing is a price which is used to capture inter company transactions of a big multinational firm where several smaller sub units within the business are treated as a separate legal entity in bookkeeping. With our detailed analysis, you will get a better idea of concepts.
For example, there is a company X which manufactures batteries for different purposes. Now, Company X is taken over by company Z who also owns company Y which produces cars. Company Y now wants to purchase batteries from Company X. Since both of X and Y have the same parent company but have separate books of accounts, they require a transfer price for transacting with one another.
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What is hybrid transfer pricing?
Transfer Pricing can be based on cost of product as well as market variables. In such situations, the transfer price is usually an average of both market price of comparable items as well as cost incurred in the production of the product.
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Mechanisms of hybrid transfer pricing:
- Negotiated Pricing:
When this happens in a company the managers of the respective buying and selling companies negotiate the conditions of the transfer. For example selling division might only sell if it achieves some pre agreed amount of profit. Used when there is volatility in the market.
- Dual Pricing:
Is a transfer pricing strategy where two separate transfer pricing mechanisms are used. For example, Sales Division uses Cost Based Transfer Pricing whereas Purchasing Division uses Market Based Transfer Pricing Strategy. It is seldom used.
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Risks and Benefits of Transfer Pricing:
Benefits:
- It reduces income tax obligations in high tax countries by moving goods to low tax environments and maximizing profits.
- It reduces duty costs by exporting goods to high tax countries at minimal costs, and tariff duties remain small.
Risks:
- Executing Transfer Pricing incurs additional costs to business and also consumes an enormous amount of time.
- Appropriate transfer pricing policy for intangible assets such as services is difficult to be determined accurately.
- Companies might misuse Transfer Pricing Policies and avoid Taxation.
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