What is transfer pricing?
Transfer pricing is the rates or prices that are utilized when selling goods or services between company divisions and departments, or between a parent company and a subsidiary. The transfer pricing that is set for the exchange may be the original purchase price of the goods in question, or a rate that is reduced due to internal depreciation. When used properly, transfer pricing can help to more efficiently manage profit and loss ratios within the company. Generally, transfer pricing is considered to be a relatively simple method of moving goods and services among the overall corporate family. In situations where the transportation of goods is involved in the transaction, the transfer pricing may include both a fixed price per unit transferred, plus additional charges to cover the cost of shipping. This model is especially helpful when the transfer takes place between a parent company and a subsidiary. The larger entity can arrange the shipping through a discounted shipping plan that t
Transfer pricing is the price charged by one associate of a corporation to another associate of the same corporation. When one subsidiary of a corporation in one country sells goods, services or know-how to another subsidiary in another country, the price charged for these goods or services is called the transfer price. All kinds of transactions within the corporations are subject to transfer pricing including raw material, finished products, and payments such as management fees, intellectual property royalties, loans, interest on loans, payments for technical assistance and know-how, and other transactions. The rules on transfer pricing requires TNCs to conduct business between their affiliates and subsidiaries on an “arm’s length” basis, which means that any transaction between two entities of the same TNC should be priced as if the transaction was conducted between two unrelated parties. Transfer pricing, one of the most controversial and complex issues, requires closer scrutiny not
Since the beginning of the Maquiladora industry in Mexico in 1965, the Mexican government considered the Maquiladora industry as a “Cost Center” for income tax purposes; that is, a small percentage of income tax was paid to the Mexican government on this basis. In 1994 along with the advent of NAFTA, Mexico and the U.S. negotiated a Tax Treaty designed to avoid the double taxation of the Maquiladora company in Mexico. In 1995 Mexico joined the OECD (Organization for Economic Cooperation and Development), and developed policies for applying arms-length transfer pricing standards for inter-company transactions (foreign company’s payments for the manufacturing services of their Maquiladoras). The result is that the Maquiladora was recognized as a “Profit Center” and taxed as any other Mexican company. Mexican Transfer Pricing rules for determining the Maquiladoras income are generally consistent with the U.S. Transfer Pricing rules, so the U.S. company should receive a deduction for the M
Let’s say Company A owns 100% of Company B. Company A produces a product that is resold by Company B. The price charged by Company A to Company B for that product is the Transfer Price, since they’re essentialy the same company anyway and are just “transferring” the product from one division to another.
