It matters how the cake is shared!
Shifting funds from the left hand pocket to the right hand pocket – costly, but not really relevant for management
Managers about transfer pricing
In fact, how funds are shifted affects various management decisions:
- Make or buy
- Capital expenditure
- Market entries / assignment of customers to group entities
- Product mix
- Allocation of products to sites
In addition, performance measurement may be tied to transfer pricing scheme employed. The market requirements determine an integrated group’s strategy, the business processes and the associated decision processes. Accordingly, the tax strategy is only one of many factors determining an integrated group’s transfer pricing policy.
Overall objective is to find the most appropriate transfer pricing method
Developing a transfer pricing system serving both, business and tax purposes is a major challenge. A transfer pricing policy, therefore, results from a comprehensive analysis encompassing six major work steps.
Given the competitive situation, what are the group’s overall objectives? (innovator, cost leader, …)
How are decisions taken regarding the range of products or services offered, product development, market cultivation and product pricing?
The entities’ functions such as import/distribution, (contract) manufacturing, (contract) development and contract services are identified. Revenues and resources are assigned to these functions by segmenting both, P&L and B/S accordingly.
Result is an overview of each entity’s intra-group transactions by type of product or service. In addition, the current pricing mechanism is analyzed.
The OECD transfer pricing methods are the building blocks of the transfer pricing system. The most appropriate method is identified taking into account the functional and risk profiles and criteria such as: strategic fit, tax defensibility and administrative burden. The intended change’s tax impact on open years has to be considered as additional criterion.
The transfer pricing system, i.e., the procedures to determine and adjust prices, are integrated in the group’s business processes. The process should be automized to the extent possible.
Once implemented, the respective transfer pricing policy needs regular review and adjustment in order to cope with ever changing business requirements.