Question

what is the problems that arise specifically when determining transfer prices where divisions are located in different countries

Answer 1

ANSWER=

The basic object of transfer pricing is that reievant division within an organisation are evaluated effectively and the transfer price does not distort divisional performance evaluation .

The level at which a transfer price should be set, however, is not a straight-forward decision for organisation.The situation is even less clear cut for organisations operating in a number of countries, when even more factors need to be taken into consideration .

Following are some of these factor or problems and their impact on the transfer price as stated below:-

A)- EXCHANGE RATE FLUCTUATION-

The value of a transfer price of goods between profit centers in different countries could depend on fluctuations in the currency exchange rates.

B)- TAXATION IN DIFFRENT COUNTRIES-

If taxation on profits is 20% of profits in india and 50% of profits in America, SSA will presumably try to Manipulate Profits (By means of raising or lowering Transfer price or by invoicing the subsidiary in the high-tax country for services provided by the subsidiary in the low-tax country). So, that profits are maximised for a subsidiary in INDIA, by reducing the profits for a subsidiary in AMERICA.

C)- IMPORT TARIFFS/CUSTOMS DUTIES-

Suppose that America imposes an impot tariff of 20% on the value of goods imported. In such a sitution, SSA would minimize costs by keeping the transfer price to a minimum value.

D)- EXCHANGE CONTROLS-

If a country imposes restriction on the transfer price of profits from Domestic subsidiaries to foreign multinational, the restriction on the transfer can be overcome if head office provides some goods or services to the subsidiary and charges Exorbitantly high prices, Disguising the profits as sales revenue , and transferring them from on ecountry to the other.