Transfer pricing is basically about setting the costs for goods and services. These are sold between related businesses within the same corporate group. Let us give you an example. When a subsidiary company provides any services or goods to the major company, the price set up during this is the transfer pricing methodology.
Businesses generally rely on transfer pricing to ensure the price is fair compared to market value. This process is set by the OECD. This transaction requires the governing entity to select the best pricing method.
Selecting a transfer pricing method is a great tactical decision. It benefits from using resources and tools to help the companies identify the best method.
In this blog, we will take a look at the best transfer living methods in 2024.
What is Transfer Pricing?
In its simple explanation, transfer pricing is a type of accounting practice. It represents that one company division charges the other for the goods.
It is something that allows establishing goods prices. Additionally, it allows the exchange of services between two subsidiaries of a company. The transfer pricing may save taxes for corporations.
How Does The Transfer Pricing Work?
Transfer pricing is a taxation and accounting practice. These practices allow the pricing transactions within the business. It also allows transaction pricing through the subsidiaries that work internally. Generally, these practices extend cross-border and domestic transactions.
A transfer price can decide the price to charge the other division or subsidiary. It also determines the cost to charge any holding company.
Generally, the transfer prices reflect the market price of that time. It may also be applied to intellectual properties.
As of right now, MNCs may legally use transfer pricing. They can do it to allocate the earnings among the affiliate companies and subsidiaries. However, organizations can sometimes also use it by altering the taxable income. It is something that reduces the overall taxes.
Transfer pricing is a way organizations may use to shift tax liabilities. They can shift it to low-cost tax jurisdictions.
The Benefit Of Transfer Pricing
Companies can decrease the appropriate cost by using the practices of transfer pricing. It is a must for companies to export services and goods at a lower price to some countries. However, this is only true for countries that have higher tax rates. Because of this, the tax liability will be low.
By using transfer pricing, companies will gain a larger profit margin. Organizations need to export the services and goods at a higher price. But this is the case only if those countries have lower tax rates. They will have the leverage of lower tax rates in those countries—the provisions of transfer pricing aim to bypass any kind of manipulation or unethical activities.
Transfer Pricing Methods
Irrespective of which transfer pricing method you choose, the company may use a transfer pricing tool to remove the manual burdens. The software-based transfer pricing also enables you to monitor the success of every method. You may gather valuable insights here to help you in the long run.
Speaking of the transfer pricing method, you must go with the option that gives greater fiscal benefit. Here are the most common transfer pricing methods:
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CUP Method
The CUP method basically comes up with a price based on the pricing of similar transactions made between the parties. Many consider this to be a reliable transfer pricing method. It is also one of the most difficult methods out there to challenge.
The only challenge with this is that the comparable transactions are difficult to find. Even small variables can alter the outcomes in this method. If that is the case, then the method might seem insufficient in some instances.
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Resale Minus
The Resale Minus is a methodology that bases the price according to the resale price. However, you should know that the price is adjusted by subtracting the additional costs and gross margins. These additional costs are related to the purchase.
The resulting figure is taken as the arm’s length price once these deductions are over. The price will guide the transfer price between the two parties.
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Cost Plus
Sometimes, organizations use the cost-plus transfer price method. It is done when there is no sort of market price available. The process is basically the calculation of standard costs of goods. A standard profit margin is added at the top of this. The total of these numbers may be used as a fair transaction price.
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Profit Split
The profit split is a great method. Here, there are two parties involved in the development of a product. Because of this, it is difficult to check each party on their own. Therefore, the profit split method uses the profitability of a product. Then, it develops a method of profit-splitting. With that, it is fair to both organizations.
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TNMM
There are some times when no data is available. During those times, companies use the margin levels to set up transfer pricing. The TNMM method uses the net profit from other controlled transactions to set up a net profit.
Wrapping Up
You can use any transfer pricing methodologies you wish. The process is always data intensive. However, you have to ensure you understand each transfer pricing method to know which one is the best for a certain scenario.
