Page 188 - International Marketing

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190 International Marketing BRILLIANT'S

in an environment of low-level inflation and another in a climate of rampant
inflation.
3. Subsidiary profits: Still another use of transfer pricing is to
manipulate the profit position of a subsidiary. For example, startups often
require substantial corporate assistance, which can be provided in the
form of lower purchase prices from or higher sales prices to other company
units. In this way, a market niche can be carved out more quickly for the
startup and its long-term survival guaranted.
4. Expense accounting: Transfer prices can also be used to
advantage when the host government imposes restrictions on allowable
deductions for expenses. Sometimes certain services, such as product
development or strategic planning assistance are provided to the subsidiary
but cannot be charged because of restrictions. In that case, costs for
those services can be recouped by increasing the transfer prices of com-
ponents sold to the units.
5. Joint venture support: Similarly, transfer pricing can help recoup
expenses from a joint venture, especially if there are restrictions on
repatriation of profits. Lowering the prices of products and services to a
parent reduces the outflow of funds from the home country, while raising
the prices of purchases from the parent shifts funds to the home country.
When government imposes local price controls, transfer pricing practices
may again help. Higher transfer prices on exports of intermediate goods
from a parent to a subsidiary in such a market may help support the case
for an increase in the price of the final product.
6. Output capacity: Subsidiaries with substantial excess production
capacity can set transfer prices low enough to encourage additional internal
consumption, but high enough to cover the supplying unit's variable costs.
As implied by the above discussion, the ability to control internal
prices charged to subsidiaries affords the global corporation significant
flexibility and overall efficiency. Nevertheless, these benefits often come
at a cost. First, there is the complication of internal control measures.
Manipulating transfer prices makes it very difficult to determine the true
profit contribution of a subsidiary. Second, morale problems typically
surface at a subsidiary whose profit performance has been made worse
artificially. Third, because of cultural differences, some subsidiary
managements may react negatively to price manipulation. Fourth, there
is the concern over local regulations. Subsidiaries, as local businesses,
must abide by the rules. Legal problems will arise if the subsidiary follows
accounting standards that are not approved by the host government. Indeed,
in many countries, transfer pricing practices are often subject to close
review by local authorities.