Generally, there is a transfer of goods and services that take place between related parties or between one unit of a firm to other units located in different countries. There is a certain price that is associated with these transfers and that price or value is called Transfer Pricing, there are certain exceptions attached to it, you will get to know about them as you read on.
What are the transactions that are subject to transfer pricing?
Here are some general international transactions that are directed by Transfer Pricing Rules: –
- Sale of finished goods
- Purchase of raw material
- Purchase of fixed assets
- Sale or purchase of machinery
- Sale or purchase of Intangibles
- Reimbursement for expenses paid/ received
- IT Enabled services
- Support services
- Software Development services
- Technical Service Fees
- Management fees
- Royalty Fees
- Corporate Guarantee fees
- Loan paid/ received
Why is Transfer Pricing important?
Here are the following reasons that make transfer pricing important: –
- It aids in generating separate profit for each of the divisions, moreover, it helps in evaluating the performance of each division separately.
- Transfer prices not only affect the reported profits of every centre, but it also affects the allotment of an organisation’s resources.
- Transfer Pricing is of utmost importance to companies, as it aids in allocating revenue and expenses to such subsidiaries in a specific manner. It is important for the organisations having cross-border intercompany transactions to understand the concept of Transfer Pricing.
- The profitability and subsidiary of the inter-company transactions are dependent on the prices. If the inter-company transactions face any kind of scrutiny by the Government, then, in that case, transfer pricing plays a crucial role, wherein it impacts the shareholders’ wealth which in turn influences company’s taxable income and its after-tax, free cash flow.
- A company having cross-border intercompany transactions is required to understand the concept of transfer pricing, mainly for the requirements associated to compliances and related to risks of non-compliance.
What are the short-comings of Transfer Pricing?
Here is the list of short-comings associated with Transfer Pricing: –
- There are changes, wherein the managers of the different divisions of an organisation have problems with how transfer pricing is supposed to be set.
- In order to carry out transfer pricing, the organisation would require more resources.
- At times, the problems associated with transfer pricing in MNCs can become extremely complex.