7The Good and Bad of Transfer Pricing

Presented For:Prof Madya Dr Noraini Mohamad

Presented By:

Marlina Baharuddin

Maslina Musa

Mohd Zulkamar Johari

Nurul Syafiqah Russain

Siti Fatimah Razak

• Relates to the system of pricing the cross-border transfer or sold of goods, services and intangible between entities in a group of Multinational Enterprises (MNE) .

Definition

Arm’s Length Price

Price which two independent firms would agreed on- ascertaining an acceptable price mechanism.

Price which is generally charged in a transaction between persons other than associated enterprises.

According to the OECD members countries have adopted the arm’s length principle when dealing with associated enterprises due to following reasons:

a) It provides broad parity treatment for MNE’s and independent enterprises

b) It puts both associated and independent enterprises on a more equal footing for tax purposes and thus avoids creation of tax advantages or disadvantages that would otherwise distort competitive position of other entity

c) It promotes the growth of international trade and investment

Cost-Price

Market-Price

Negotiable Price

Transfer

Pricing Method

Cost-Based Transfer Pricing

Advantages

Simple to do

Disadvantages

Which measure of cost to use??

Can transfer pricing inefficiencies to other units

Market Based Transfer Pricing

Advantages

Eliminate the risk of inefficiencies being transferred.

Ensure divisional autonomy

Disadvantage

Depends on existence of competitive markets

Negotiated Prices

Advantages

Freedom to bargain is preserved

Divisional autonomy

Disadvantages

External markets required

Can take a long time

Sub-optimization issues

Rewards negotiation skill as opposed to actual productivity

Reduce tax burden

Increase profits

Advantages

The complex process of transfer pricing

The portion of their net income subject to tax- vary from state to state

Disadvantages

Example of Transfer Pricing Case

It had made creative use of transfer pricing for a

variety of trademarks, trade names, trade secrets, brands, service marks and

intellectual property

With a fee of US$9.2 KPMG advised the company to

increase its post tax earnings by adopting an intangible asset transfer

pricing program

Thus, the company created the asset “management foresight” and registered in a low tax jurisdiction and licensed it to its subsidiaries in

exchange for annual royalty payments, and this anticipated tax

savings of US$25 mill in 1st year and US$170 mill over 5 year

Over 4 year (1998-2000) more than US$20 bill was

accrued in royalty fees for use of the company’s

intangible assets

The paying subsidiaries treated royalty charges as an expense that qualified

for tax relief whilst the income in the receiving co attracted tax at a low rate

This transfer pricing arrangement may have saved the co between

US$100 mill and US$350 mill in taxes

Thank You