Page 187 - International Marketing

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BRILLIANT'S Overseas Market 189

1. Should the transfer takes place? Should the company make the
item or outsource it, i.e. purchase it on the outside market?
2. If the answer to a first question is yes, then what type of transfer
pricing should be used?
3. Should the central office interfere in establishing the transfer price?
Criteria for Determining Transfer Pricing
The criterias for determining the transfer price are as follows:
1. Transfer price should help in accurate measurement of divisional
performance.
2. Transfer price should motivate the divisional managers into maxi-
mizing the profitability of their divisions and making decisions
which are in the best interest of the organization as a whole.
3. The transfer price should ensure that divisional autonomy and
authority is preserved.
4. The transfer price should allow goal congruence to take place. It
implies that the objectives of the divisional managers are com-
patible with the objectives of overall company.
5. A transfer pricing system should check the international groups
which may try to manipulate transfer prices between countries
with a view to minimize the overall tax burden.
Factors Affecting Transfer Pricing
There are many factors which help in deciding which transfer price to
use. These factors are as follows:
1. Local taxes: The most significant concern in setting transfer prices
is the local tax rate and tax regulations. The use of transfer pricing to shift
profits into local jurisdictions that have
relatively lower corporate tax rates normally Factors Affecting
results in lower overall income taxes. Transfer Pricing
However, high prices for captial assets
increase the depreciation allowances for the 1. Local taxes
business units that receive them. This lowers 2. Currency fluctuations
overall taxes when the assets are transferred 3. Subsidiary profits
from lower to higher rate jurisdictions. 4. Expense accounting
An effective transfer pricing system 5. Joint venture support
should deal with changes in import export 6. Output capacity
duties, income taxes, excise taxes and so
on in a way that minimizes these taxes overall.
2. Currency fluctuations: Transfer prices can be adjusted so as to
balance the effect of fluctuating currencies when one subsidiary operates