TRANSFER PRICING IN MNCs
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Transcript of TRANSFER PRICING IN MNCs
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Prepared by: Sherin Joy
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“Transfer pricing is the price charged by one business unit for the products & services transferred to another business unit of the same company to calculate the profit & loss of each division separately.”
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Reasons: Differences in corporate tax rates
Restriction on profit repatriation transferred from patent country
High customs duty
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Acquisition of huge economic power
Liberalization
Government moving away from control of productive resources
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Described as most likely to result in an accurate of an arm’s length price
Comparison between: controlled transaction and independent transaction
Appropriate for fungible property
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A Co. sells spares to B Co, a related party. It also sells spares to C Co., an unrelated party, for $100.
Under CUP, A Co. would charge B Co. $100 (with possible adjustments for differences in shipping costs, etc.).
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Arm’s length price of a controlled sale is equal to the applicable resale price less an appropriate mark-up
Contrast to CUP method
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A Co. sells spares to B Co., a related party, and B Co. sells them to unrelated retail customers for $200 each.
Distributers in a similar line of business usually earn 20 percent of the sales price.
Under the retail sales method, the price on the sale from A Co. to B Co. would be $160 ($200 – (20% of $200)).
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When a manufacturer sells its product to a related party or when a related buyer adds value to the product it has purchased from a related party.
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A Co. manufactures spares at a cost of $50, sells them to B Co., a related party, and B Co. sells them to unrelated retail customers for $200.
Contract manufacturers in similar lines of business typically earn a gross profit of 30%.
Under the cost-plus method, the price on the sale from A Co. to B Co. is $65 ($50 + (30% of $50)).
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It evaluates whether the allocation of the combined operating profit or loss attributable to one or more controlled transactions is arm’s length
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A Co. and B Co. are related persons engaged in the production and sale of pharmaceuticals.
A Co. engages in lots of R&D to produce its pills.
B Co. sells the pills after affixing its valuable trade name to the packaging.
They earn profits of $8 million from the common enterprise.
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Here, the arm’s length price is arrived by determining the net profit margin made from the controlled transaction
Comparison between operating profit for the inventory purchased
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