Page 190 - International Marketing

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192 International Marketing BRILLIANT'S

1. Tax Savings: Imagine a company with two branches, where one
makes semi-finished goods in a low-tax country and exports them to a
branch in a high-tax country, where they are finished and sold. By increasing
the transfer price and declaring more of its profits in the low-tax country,
the company can reduce its global tax bill.
2. Boost Profits: By undercharging for goods crossing national
borders, a company can save money on customs duties paid by the branch
in the importing country. Conversely, by overcharging, a company can
extract more money from a country with tighter currency outflow restrictions.
3. Measure Performance: Companies need to know how their
individual divisions are performing. A way of measuring that is through
transfer pricing. By setting a price for goods in each stage of the production
process, a company can measure the profitability of each division and
decide where to make organizational adjustments.
4. Arm's Length Standard: The basic principle of this standard used
by most developed countries is that for transactions between branches a
company should use market prices. However, enforcement of this rule is
complicated, especially when a company has branches in numerous
countries.
5. Maintains Autonomy: Since, autonomy means decentralization
and freedom to make decisions, it is also an ingredient in motivating effort.
Managers may exert considerable effort in pursuing their own goals that
conflict with the goals of the firm. Central office interference in a transfer-
pricing dispute will affect autonomy and effort. The dilemma is that goal
congruent behavior may not be obtained with or without interference.
Financial Aspects of International Transfer Pricing
The transfer pricing can be adopted to minimize tax or import duty
liability or to transfer funds.
1. Transferring products into a high duty country at very low prices
may result in low import duty.
2. Transferring products into a high tax country at high prices can
effectively transfer profits from the high tax country to the low tax
country.
3. Products may be transferred at high prices into a country from
which dividend repatriation is restricted or subject to high tax.
4. It can avoid an accumulation of funds in a country with high infla-
tion rates or where an early devaluation is thought to be a prob-
ability or where expropriation is feared.
5. It can be used as a means to concentrate profits.