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What is Transfer pricing report

Transfer pricing can be defined as the value which is attached to the goods or services transferred between related parties. In other words, transfer pricing is the price which is paid for goods or services transferred from one unit of an organization to its other units situated in different countries.

Purposes of Transfer Pricing

  • Generating separate profit for each of the divisions and enabling performance evaluation of each division separately.
  • Transfer prices would affect not just the reported profits of every center, but would also affect the allocation of a company’s resources

Transfer Pricing Methodologies :

The good thing about transfer pricing is that the principles and practices are quite similar all around the world.

1. The Cup Method

he CUP Method compares the terms and conditions (including the price) of a controlled transaction to those of a third party transaction.

2. The Resale Price Method

As a starting position, it takes the price at which an associated enterprise sells a product to a third party. This price is called a “resale price.”

3. The Cost Plus Method

The Cost Plus Method compares gross profits to the cost of sales. The first step is to determine the costs incurred by the supplier in a controlled transaction for products transferred to an associated purchaser.

4. The Transactional Net Margin Method

With the Transactional Net Margin Method (TNMM), you need to determine the net profit of a controlled transaction of an associated enterprise (tested party).

5. The Profit Split Method

Associated enterprises sometimes engage in transactions that are very interrelated. Therefore, they cannot be examined on a separate basis. For these types of transactions, associated enterprises normally agree to split the profits.

Transactions subject to Transfer pricing

The following are some of the typical international transactions which are governed by the transfer pricing rules:

  • Sale of finished goods
  • Purchase of raw material
  • Purchase of fixed assets
  • Sale or purchase of machinery etc.
  • Sale or purchase of Intangibles
  • Reimbursement of expenses paid/received
  • IT Enabled services
  • Support services
  • Software Development services

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Why Organizations need to understand Transfer Pricing

For the purpose of management accounting and reporting, multinational companies (MNCs) have some amount of discretion while defining how to distribute the profits and expenses to the subsidiaries located in various countries.

  • The profitability of a subsidiary depends on prices at which the inter-company transactions occur.
  • It is important that a business having cross-border intercompany transactions should understand transfer pricing concept.

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