Today we will be looking at 10 factors affecting transfer prices in multinationals. We all know that transfer pricing can be abused by mutational in their bid to evade taxes (or avoid taxes) thereby improving profit for their owners. But there is a legitimate strong case for the use of transfer pricing especially in the area of motivating staff.
10 Factors Affecting Transfer Prices in Multinationals
- Inflation: the inflation of both countries involved has to be considered when fixing the transfer price of multinational corporations. Managers and top management would not want to transfer profits to countries with hyper inflation as doing so may mean exposing the earnings to unnecessary capital erosion.
- Exchange rate fluctuations: Exchange rate fluctuations have similar effect on transferring parties just like inflation.
- Tax regime of different countries: the relevant tax laws of the countries involved in the transfer pricing scheme has to be considered and any potential tax implication(s) evaluated before deciding on what transfer price to set.
- Goods and services Exchange controls: even though we now live in a borderless economy, there are still some restrictions when it comes to the movement of certain commodities. For a transfer price to be effective, management must the impact of goods and services exchange control.
- Nature of the transaction: the nature of a transaction is an important variable that must be carefully considered in order to set a multinational transfer price. Companies can easily fix a transfer price of their choice for transactions that are unique and Novell.
- Impact of the transfer on host nation: many companies have in the past been publicly criticised for not considering the impact of transfer price on their host nation. A competing company can easily take a jibe on your brand and reputation simply by evoking the moral implications of the competitors transfer pricing scheme especially when used to move taxable income abroad – even though it is done legally.
- Impact on the motivation of participating parties: a serious thought has to be in here. How will the managers of the transferee company feel about a multinationals transfer pricing policy when it is likely to affect their appraisal?
- Import duties: a major decision to make as far as fixing a price at which to transfer goods and services between countries is the import duties that have to be paid on the transaction. A cost and benefit analysis has to be carried out in order to ensure that the company will not be finically worse-off as a result of its actions.
- Anti-dumping legislations: in a bid to protect economy and jobs, many countries have anti-dumping legislations in place. This legislation prohibits the transfer of certain goods and services into their countries. A multinational planning to fix a transfer price must consider how this will affect the whole process.
- Competitive pressure and goal congruence implications: this follows on from the motivational aspect of transfer pricing. Management of a multinational have to ensure that any price that is fixed will not lead to dysfunctional behaviours. In many organizations, employee rewards schemes are tied to performance which can be negatively affected by the price at which the service of a division is transferred to another.