Prime Co Transfer Pricing

Topics: Transfer pricing, Royalties, Taxation in the United States Pages: 6 (2019 words) Published: February 22, 2012

Gregory Vanford, turned his passion for research and development to the successful innovation of cell phone component products for his cell phone company he founded, PrimeCo, later leading to further success by introducing the birth of his subsidiary company SubCO for international market. Vanford was awarded for many patents for his smart decision to invest in research and development. As his consumer base grew so did profitability for his sellers. Through research and development, Vanguard was able to identify the needs of consumer when they used their cell phone and would find ways to solve those issues while making profit at the same time. Energy Saver System (ESS) is a prime example of PrimeCo’s newest product on the market. Thanks to the huge success for identifying and solving consumer issues with cell phones through research and development. PrimeCo manufactured cell phone component parts including ESS strictly for the U.S., while SubCo manufactured for the Asian-Pacific market, catering strictly to their needs in Japan. Even though the management team was able to realize that there would be a huge demand for their products in the near future in expanding market base complex issues loomed.


In Asian market uniformity and consistency is highly desired. The unification Strategy for the entire international market produces gain of lower costs, consistency of product and promotion and greater uniformity and consistency for mobile consumers. With this in mind, it gives the Japanese consumer the comfort to purchase long-term contracts with suppliers, knowing that they will consistently deliver the cell phone components. Also, another concern was geographic proximity, this aspect of buyer-supplier relationships with the physical flow of products for easy access in the supply chain is very vital for the success for international transfer pricing. This will sub-sequentially promote lower shipping cost parallel to just-in-time inventory management. The demand on deliveries of the cell phone component increases dramatically. Assemblers require that first-tier suppliers deliver several times per day, in many cases in the same sequence as the cellphone products appear on the assembly-line. This is combined with strategies towards minimum inventories of incoming components, thus producing a system that is extremely dependent on reliability in deliveries, especially in the last stage from the first-tier supplier to the point-of-assembly. Can suppliers meet this demand on an international level base for Asian-Pacific market? Another issue lies with the Japanese government not being open to foreign workers, preferring to hire within own country instead of bringing foreign workers to work on the production of new components for SubCo. Japanese companies have traditionally put the welfare of their employees over making profits and regarded creating secure jobs for their employees as being more important. When Japan is not really open to change by allowing U.S. workers into Japan in the name of increased efficiency isn’t that a problem. Not to forget, another issue in question is intercompany transaction. Is the ownership of royalty rights properly transferred as far as transfer price for the use of assets between PrimeCo to SubCo? This issue was raised as CFO, Shannon James for PrimeCo and CFO, David Gold of SubCo tried to work through those issue that arise in an international market since their expertise in handling intercompany transaction is more on a domestic level with tangible asset than intangible asset on an international base that dealt with the transfer of royalties. Any time a foreign subsidiary uses intellectual property developed by the parent, it must pay a royalty to the parent and this will be the result in solving issue between PrimeCo and SubCo. These intercompany payments must meet certain transfer pricing rules. Section 482, under Internal Revenue Code (IRC),...
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