Question

Identify the tax issues associated with the following scenarios concerning transfer prices.

Compania de Minerale is an Argentianian company which has 100% of its stock owned by U.S. Minerals, a domestic company. Compania recently discovered a huge supply of iron ore based on a mine it developed in Argentina. Compania is subject to an Argentinian income tax rate of 10% on its mining profits. Compania is required under Argentinian law to sell 20% of its mining output (the iron ore) to the Argentinian national steel company at $400/per ton. The price was set by the government without reference to market iron ore price. Compania also has a contract to sell 30% of its iron ore output to a private steelmaker in Brazil for $900/ton. The Brazilian purchaser will take ownership of the iron ore at the output of the mine in Argentina. The remining 50% of the output will be sold to its parent company, US Minerals for US Minerals to use in its US steel making operations. The iron ore will be transported via truck to plants in. Texas.

Identify some of considerations that should be taken into account in setting the transfer price with US Minerals.

Answer 1

Transfer price is to be set when an organization sales goods or services to it's group company situated or incorporated Incorporated in another country.

Transfer price should be the price at which such other organizations is selling to other independent third party.

In the given case , US minerals is the holding company of compania de minerale and since compania de minerale , Argentinian company is selling output mined by it to it's holding company i.e. US minerals thus provision of transfer pricing shall apply.

Here independent third party is the Brazilian company, thus, transfer price shall be the price at which we are selling to the brazilian company after taking into account any differences in sales terms and conditions.

In the given case we are selling to the Brazilian company without incurring freight charges as the Brazilian company is taking ownership at the point of mining itself whereas we are trasnporting iron ore to the steel plant of US minerals and hence in our price we would have add freight charges as well in case of US minerals. So after deducting the amount of freight we can arrive at the tthe transfer price.

Thus, the main thing to consider while determining transfer price is we should adjust the price charged from an independent party with the terms and conditions similar to the group transfer.