Transfer prices

Transfer prices

Transfer prices

Through business transactions from country to country, currencies values change. When transferring prices two parties come together and negotiate the value of a good or service. These two sides must receive a correct or fair amount of currency during transaction. Both sides must pay their share of taxes. This is where transferring prices was established. An organization called the OECD Organization for economic Co-operation and Development put forth certain rules and guidelines for transferring prices.

The rules to transferring prices are very complex but they provide a significant reduction in taxable fees while still following taxing guidelines. Anytime two parties from different sides of the border conduct business, the taxing authorities from both sides insist on taxing the profit made. With the issue of taxation, parties at times find ways to avoid paying taxes. Without the proper amount of taxes being paid, global corporations are withheld money they should have received. Thus making transferring price is international taxation problem for both sellers and buyers.

A solution for overcoming this problem is the Arm's length principle (AIP). The AlP allows both parties to bargain and agree upon an appropriate transfer price. This solution leaves room for argument. Parties might not agree on the price put on the table by the other; Making this method controversial.

Deciding these prices also relies on certain factors such as tasks performed, risks taken, contractual terms, economical conditions, and nature of properties and services. Risks taken include distance traveled to make the transaction. Contractual terms are the terms that have been established in the contract between the buyer and seller. Economic conditions include the state of both economics and the worth of their currency. All these guidelines help decide what is entitled to both sides. Both parties should perform the same functions, marketing and advertising dealing with the product transaction. The rules say that both sides must document pricing policies established for each transaction. So to avoid future problems, all transactions must be documented and saved for review.

Methods of transfering costs vary from tangible products to intangible products. Both tangible and intangible products use methods such as comparable uncontrolled price method (CUP), Resale price method (RPM), Cost plus method (C+), Residual Profit split Method (RPSM), and Comparable split profit method (CSPM). The Comparable uncontrolled price methods (CUP) says that similarly placed taxpayers will have similar returns over a period of time. The (CUP) method also involves the examination of financial statements of unrelated parties and ratios of profit. The resale price method (RPM) is best to find the arms length price especially if the buyer does not add too much of value to the product being purchased. The Cost plus method (C+) is best when comparing corresponding extraneous sales. Which means sales not involving the parties, but it corresponds with their present transaction. These sales are used to determine gross profit. Residual Profit Split Method (RPSM) is when one side of the transaction has part ownership of some intangibles. This says that the profit is split between both parties, but the party that does not have ownership of the intangibles receives the residual, meaning they receive the left over profit.

There are also alternative ways of price transfer. One very good way is a cost based method. These transfers are done at variable cost, full cost or at a marked up price. This method is very easily used but has limitations to its effectiveness. Another alternative way is a Market based transfer price. This is used when there is a competitive market for the goods wanted. The price used is the price that is taken from that market. But this leaves room for overpricing and errors in buying.

There is one common method for transferring prices that is used worldwide. This method is a negotiated price. This method allows both parties to bargain a price until the amount that meets both parties needs is found.

Given all these methods there are a couple more guidelines to review while transferring prices. They are fixed cost and variable cost. Fixed costs are costs that remain constant no matter sales or productivity. Variable costs are the cost of labor, the cost to make the good, and the cost to transport those goods. Fixed cost stays the same but variable cost may fluctuate due to higher productivity and demand.

Transferring different prices for different goods or services affects the world and the economy. Without that act of negotiated price, there would be no selling or buying of goods across the borders of one's home country. Dealing with transferring prices can be very challenging but if done correctly can lead to a satisfying transaction and effective marketing. Is it worth it? Yes transferring prices can lead to worldwide success and well known business transactions.

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