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TRANSFER PRICING
Transfer pricing is the term given to
pricing of services and goods in a multi
– divisional organisation, specifically
when it comes to cross – border
transactions.
Transfer pricing is nothing but the
price charged by one division of a large
firm, for services or products that it
provides, to another division of the
same firm. This is done to calculate the
profit or loss of each division
separately. Transfer pricing allows one
division of a company to charge, similar
amounts of money to another division of
the same company, as it charges to
outside customers. This is necessary in
order to find out the correct
profitability of the division. Transfer
pricing has great importance when it is
used to calculate the profitability of
different subsidiaries and affiliates,
using different currencies and work
under different political and legal
systems. In such transactions the MNCs
are confronted with several complicated
variable like political systems,
inflation, government regulations,
exchange controls, tariffs and
differential taxes.
How is Transfer Pricing relevant to
Ecommerce?
In today’s world of online business
where there are no physical boundaries,
transfer pricing plays a very
significant role. To make flow of
services and commodities easier, the new
international protocols, policies and
transactions are being moderated
accordingly. The multi national
companies have realised that
internationally accepted methods for
transfer pricing don’t work for
ecommerce cross – border activities.
They also depend on their accountants
and financial officers to reduce the tax
paid and risk of transfer pricing
audits. Since business can now be done
globally with out any problem the
traditional methods of transfer pricing
don’t work in ecommerce.
The primary reason for this is because;
all transfer pricing policies and
regulations were made keeping in mind
the laws and regulations of just one
country. The tax authorities in every
country see ecommerce as a big threat to
their tax revenues and therefore, have
made many tax laws for ecommerce
businesses. Conversely, the CFO’s and
accountants must ensure that the risk of
audits is bare minimum. To protect their
income, the tax authorities in every
country collect a good amount of tax
from the MNC’s.
Transfer Pricing methods used by
ecommerce MNC’s –
The permissible methods to determine
arm’s length prices are:
a)
Cost Plus method
b)
Resale Price Method
c)
Comparable Uncontrolled
Price Method
The 3 methods should be used in reverse
order as given above. There is a 4th
alternative method that can be used for
other situations where the 3 are not
reasonable and appropriate. The fourth
methods are the profit split approaches
like several split profit and comparable
profits methods.
The OECD’s definition for arm’s length
pricing is accepted world wide. The OECD
guidelines say that, though this
strategy comes with greater risk of
taxation than the solutions tailored in
that country, only global transfer
pricing methods can be used to find the
profitability of each division in the
company. But, different methods are
permitted in different countries to
calculate the transfer price; therefore,
care should be taken in these
circumstances. |
