What Is an Intra-Company Transfer?

The internal transfer price is the settlement price for products or services provided between the responsibility centers within the enterprise. The relevant cost centers provide products or services to each other. Generally, the standard cost or estimated distribution rate should be used as the internal transfer price. In this way, the economic effect of the production and operation of each cost center is completely the work performance of the center, and is not subject to other costs Center of influence. In addition to standard costs and estimated distribution rates, cost additions, variable costs, etc. can also be used as the settlement price for products or services provided between cost centers. The relevant profit or investment centers provide products or services to each other, generally the market price should be used as the internal transfer price. In this way, not only can the relevant responsibility centers achieve the expected profit, but also it is possible to push the relevant responsibility centers into a competitive environment, so that they can strengthen management, reduce costs and improve economic benefits under the promotion of external pressure. In addition to market prices, negotiated prices and double prices can also be used as the settlement price for providing products or services between profit or investment centers. ^[1]

Internal transfer price

1. Reasonably define each

Considerations for setting internal transfer prices:

Refers to a price used by multinational companies (between the parent company and overseas subsidiaries, and between overseas subsidiaries and subsidiaries) to export and purchase goods, services and technologies.

Multinational

Types of internal transfer prices:

1. Market price

Exist in intermediate products

According to statistics, in contemporary international trade, internal transactions of multinational companies have accounted for more than 30% of world trade. In addition, 80% of international technology trade is also internal transactions that occur within the same enterprise. Take the United States as an example. In 1984, 43% of US exports were conducted between related companies within multinational corporation groups. One third of the imports and exports of commodities in the OECD countries are internal transactions between subsidiaries, and the completion of these internal transactions has applied the strategy of transfer pricing.

The role of transfer pricing

1. Avoid taxes. Mainly refers to evading income taxes and tariffs. There are many "TaxHeavens" in the world that are named for their extremely low income taxes. A multinational company can purchase at a low price through a subsidiary located in its tax haven, and sell it at a high price. Although the goods and funds do not pass through the tax haven, this turnover on the book has caused the seller's subsidiary to sell at a "low price". It is not profitable, and the buyer's subsidiary does not make a profit if it purchases at a high price, while the subsidiary located in the tax haven has gained both parties' benefits and reduced the corporate tax. Another way to evade income tax is to take advantage of the differences in tax rates in different countries (regions). For example, when selling technology or labor services from high-tax countries to low-tax countries, the transfer price is reduced to reduce the purchase cost of low-tax countries. Profit and vice versa. In this way, the transfer of profits from countries with high tax rates to countries with low tax rates reduces the taxation of the entire company. Not only that, because tariffs are ad valorem taxes, transnational corporations can use subsidiaries in different countries (regions) to conduct cross-border intra-national trade at lower shipping prices, reduce the tax base and tax amount, and reduce the cost of imported subsidiaries. Ad valorem import duty. At this point, it is not difficult to see that multinational companies use transfer pricing to evade tariffs and the impact of income tax is the opposite. Paying less import tax pays more income tax. Generally, income tax is more important than import tax. Therefore, multinational companies weigh the advantages and disadvantages. Give priority to income tax factors.

2. Avoid risks. The risks here include: (1) Reduce or avoid the risk of changes in foreign exchange rates. Since the financial crisis, the exchange rates of currencies in various countries have fluctuated greatly and frequently, causing multinational companies to face trading risks in trade and foreign exchange risks of assets. Generally, multinational companies use currency transfer methods and "early and late" payment methods to prevent , But the use of transfer pricing can strengthen the effectiveness of this method, thereby further reducing the risk.

(2) Avoid political risks. The confiscation or nationalization of the host government is a concern for multinational companies, although multinational companies can take a series of methods, such as participating in the investment insurance plan of the government of the investing country, hiring local managers, making the host country own the company's equity, etc., to pass off some of the risk However, in specific investments, multinational companies often use transfer pricing to implement higher sales prices for subsidiaries, charge high service fees, and reduce the prices of export goods of subsidiaries to make subsidiaries into a fiscal deficit and become empty shelves, thereby investing Profits are transferred from the host country, minimizing risk.

(3) Dealing with price controls. In order to protect the legitimate rights and interests of local markets and local residents, and protect national industries, host countries have formulated market price control policies. In order to avoid allegations of host country dumping, multinational companies use transfer pricing to increase costs to increase product prices. At the same time, in order to avoid host country final product price controls, multinational companies pass products or intermediate products that produce the products to subsidiaries at high prices. High costs, increase product prices, and earn high profits.

3. Allocate funds. The global operations of multinational companies need to use a large number of funds to set up funds from various units within the entire company system and hope to recover the investment as soon as possible. However, many countries implement various controls with different limits. To this end, transfer pricing is used. Make each subsidiary pay high expenses for various production, scientific research, management, etc. of the parent company, sell the goods at a high price or buy them at a low price, and withdraw capital from the subsidiary. A similar approach is to transfer capital from low-interest-rate countries to high-interest-rate countries, or to transfer funds from subsidiaries in a timely manner when there is a good opportunity for a foreign company to expand investment.

4. Gain a competitive advantage. Transfer pricing is a magic weapon for multinational companies to gain a competitive advantage. When a multinational company builds a subsidiary overseas, it can rely on the funds and other strengths of the entire company system to use the transfer of low prices to supply low-cost raw materials, products and services for the newly established subsidiary, and buy the subsidiary's product at a high price, helping the subsidiary to quickly Open up the situation, establish a good reputation, and establish a firm foothold; when an overseas market of a multinational company is extremely fiercely competitive, the head office will transfer low prices without sacrificing costs and maintain low-cost dumping. It will concentrate financial and material resources to support the children in the market The company until it crushed its opponents and eventually occupied the market. 5, reduce the trouble caused by excessive profits. The entry of a multinational company into a new market will inevitably attract the attention of its peers. Its failure is a lesson learned, but its success is a silent horn, which attracts competitors to "grab the beaches" and easily cause a re-division of the market.