When selling/buying product internationally, it’s vital to understand different approaches the company can take in this intra-corporate transactions. The main goal of transfer pricing is to maximize overall after-tax profits of company. Other goals are as follows: decreasing occurrence of custom duty fee, avoiding the quota restrictions on imported goods and lowering exchange exposure. Therefore, we are going to exam some of the common methods of transfer pricing for international marketing.
- Transfer At Cost Approach – this method is commonly used by companies that recognize that sales by global partners contribute to company profitability by creating economy of scale in local manufacturing operations. This tactic adopts lower costs lead to better affiliate implementation, which ultimately profit the entire organization. This method helps keep company’s payments at a minimum. Firms utilizing this approach have no profit expectation on transfer sales. However, their expectation is that the partner will generate the profit by subsequent resale.
- Cost-Plus Pricing Approach – firms utilizing this approach are selecting the position that profit must be revealed for any services or products at every phase of movement through the business system. This approach may result in a price that is very irrelevant to competitive or demand situations in international markets.
- Market –Based Transfer Price – also referred to arm’s length pricing, this approach is the form of transfer pricing in which the sales transactions happen between two unrelated (arm’s length) parties. This approach can deprive governments of their fair share of taxes from global firms and expose international business to possible double taxation. This method is often utilized in commodity –type goods, where the market price is set without variation.
- Cost – Plus Pricing Method- this approach is commonly used by companies who need to show the profit for any product or services at every stage of transfer through the firm’s system. This method is successfully used by many experts, even though cost-plus pricing may result in a price that is unrelated to competitive or demand situations.
Below are some advantages of the international transfer pricing strategies:
- Decreasing income taxes in high-tax nations by overpricing commodities transferred to units in such nations; incomes are eliminated and shifted to low-tax nations.
- Reducing tax costs by shipping commodities into high-tariff nations at minimal transfer prices so that payment base are low.
- Assisting dividend repatriation (process of converting a foreign currency into the currency of one’s own country) when dividend repatriation is controlled by government policy by inflating prices of commodities transferred.