In the case of a market-based transfer pricing, companies set the transfer price to align to the product price in a competitive market. Since the market-based transfer pricing uses the normal market rate, subsidiaries involved in the transaction would get the same amount as they would if they were transacting with the third party (McWatters & Zimmerman, 2015). However, companies rarely use this method. Regarding negotiated transfer pricing, subsidiary firms engage in negotiation which is time-consuming. Also, negotiation may result in conflicts since the outcome depends on the bargaining power of the subsidiaries (McWatters & Zimmerman, 2015). Moreover, the price negotiated does not depend on the economic situation in the country rather the managerial skills to negotiate. The firm should employ measures that would help to generate profit from all the subunits and departments separately. With these measures, the company’s profit will increase as a whole (McWatters & Zimmerman, 2015). Reserving the right to mediate the negotiation process and offering an arbitrated solution is necessary.
In transfer pricing, one approach that could be used to repatriate excess cash for multinational companies is to reduce their tax liabilities. This could be done by decreasing the firms’ taxable income. On the same note, a firm’s taxable income will decrease if the selling price that creates the various level of revenue is adjusted. The approach can be dangerous if it does not comply with the arm’s length and can result in the violation of transfer pricing. Precisely, firms must comply with the rules and regulations of transfer pricing in determining their income, deductions, credit and allowances (Bowen, O’Meara & Thornton, 2011). It is essential that organizations maintain a complete documentation of transfer pricing calculations since they may play a critical role in defending the firm against adjustments in the case when the tax authority inquire.
Bowen, D., O’Meara, J., & Thornton, G. (2011, Feb. 24). What manufacturers need to know about transfer pricing. IndustryWeek. Retrieved from http://www.industryweek.com/software-amp-systems/what-manufacturers-need-know-about-transfer-pricing
McWatters, C. S., & Zimmerman, J. L. (2015). Management Accounting in a Dynamic Environment. Routledge.
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