IFM 2015
Concept
It is the pricing of inter-corporate transactions.
There exist vertical and horizontal linkages among these units.
The prices charged on raw material and finished goods sold and
bought from one unit to the other within the MNC is known as
transfer pricing.
These prices are normally either under-invoiced or over-invoiced.
The difference is that arms-length pricing is done between
unrelated parties.
The objectives of the MNC firm determine what should be done
over or under invoicing.
The overall objective is maximization of global profits.
Accordingly, transfer pricing practices emerge.
Other motives
4. Reducing tax burden: On account of
corporate tax differentials amongst different
countries MNCs introduce transfer pricing
for manipulating income and avoiding
taxes.
5. Lowering of tariff burden: It is seen that
reduction of tariff burden is often amore
important motive that reduction of tax
burden. However, quantitative restrictions
cannot be handled through transfer pricing.
Methods
Regulation
Contd.
This was introduced for the first time in US
in 1973.
It has been found that this method is
completely unsuitable for 40% of the cases.
Many a time host country government fix a
ceiling on royalty payments within the firm.
But this is also resisted by MNCs.
Sometimes arbitration is sued for
overseeing such control and regulation.
Indirect regulation
A. Harmonization of tax and tariff
differentials between home and host
country.
B. Tax holidays.
C. Avoidance of Double Taxation treaties.
D. Taxation of royalty and other intra-firm
payments for compensating for loss of
corporate tax revenue.
E. Apportion consolidated profit on the basis
of some criteria like sales or assets. This is
resisted by MNCs on various ground.