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. Contact one of our helpful account representatives to assist you in the setup of a high risk merchant account or offshore merchant account for a high risk merchant.