Question

Discuss the issues relating to Transfer Pricing techniques engaged by Multinational Enterprises specifically as it relates to how the MNE's report on its profit in a particular Jurisdiction. Use examples to illustrate your answers

Answer 1

Transfer pricing is basically the agreement of certain terms and conditions that relates to the controlled transactions within an enterprise. The total income reported in the financial report are divided among the various segments of an enterprise.

Multinational enterprises uses this transfer pricing for the purpose of allocating the profit to earnings before the income taxes and interests.

The issues regarding this to the multinational enterprises are as follows :

1) In the enterprise there are various departments, and departments may have issue among goods. themselves regarding the policies framed for transfer and pricing. This happens because certain policies led to the decline in profit of a particular department and hence in financial reports profits reported by that department would be less than others. So they create disagreements often regarding policies.

2) To maintain this transfer pricing and also maintaining the accounting regarding profits and all, it costs extra prices and extra manpower. All this contributes to increasing cost for the company.

3) There are various assets or products that are intangible and which cannot be priced. This creates a problem many times. Like we can see, the services which are provided by enterprises, it is hard to price them as actully they do not have a fixed cost but rendering those services to others costs to the company.And of they are not priced accurately, it can affect the profit made by the company and also affect the financial reports.

Let us see this with an example.

A company manufactures furnitures and also provide home delivery of those products. Now the cost incurred in its manufacturing and materials and all direct and indirect taxes can be distributed among the various departments. But the company also costs for the transportation charge it gets while delivering the items. Now it is a challenging job as to how much cost should be estimated for this and distributed among departments. Because estimating this cost factor is not fixed and nor easy to be calculated.

This thus is an area where companies face problem regarding transfer pricing.