S.A.M. Advanced Management Journal, v74n2, Spring 2009.
The authors give a beneficial guide for managers for selecting and implementing a transfer pricing policy. According to the article, transfer pricing are the amounts charged for goods and services exchanged between divisions of the same company. In a multinational company strict international tax laws regulate the amounts charged for goods and services, tangible or intangible, which cross borders. The article advises a company with operations in more than one country to be cautious when setting transfer prices for goods or services sold between divisions. The managers can learn from this article that methods traditionally used to set prices between divisions in a single country may not be acceptable for international tax purposes.
The article addresses two major types of transactions, intra-company sales of products and intra-company licensing of intangible property. A multinational company can maximize the profits by shifting profits from divisions in high-tax to divisions in low-tax jurisdictions countries. A description of how global transfer pricing works is given along with transfer pricing effect on taxable income. In this global economy, the trend for countries is to strengthen their effort to collect tax revenues from transfer pricing. A company can mitigate tax conflicts by negotiations and price agreements. The article describes the arms-length principles used by most countries and standardized by IRS S428 and by OECD (Organization for Economic Co-operation and Development) rule. The article indicates what challenges need to be resolved when applying these standards. Under the arm’s length principle one compares the remunerations from cross-border controlled transactions within multinationals with the remuneration from transactions made between independent...