IFRS and Transfer Pricing Certainly,

IFRS and Transfer Pricing

Certainly, one cannot make profit out of oneself. However, factors that vary by country such as taxes, level of ownership, dividend payout ratios and tariffs mean that intra-group trading can impact the bottom line of a multi-national company.

A well-known way intra-group trading leads to improved profitability is tax avoidance. Since each country has a different tax rate, multinational companies can increase their profits by lowering prices in countries where tax rates are high and raising them in countries with a lower tax rate (Singh, 2007). While most national and international tax codes require that transfer prices be set as though they are arms-length transactions between unrelated parties, firms operating in more than one tax jurisdiction with high gross operating margins or intangible assets for which there is no clear market price have ample opportunity to pursue aggressive transfer pricing policies (Taxes & multinational corporate strategy).

Profit maximization, as indicated by the profit maximizing price function, is also derived from variables besides the effective marginal tax rates in both parent and subsidiary countries. These variables include the level of ownership in the subsidiary, the dividend payout ratio of the subsidiary and the tariff on the goods transferred (Fowler, 1978). For instance, a parent company that has a low level of ownership in a subsidiary may want to lower the price paid to that subsidiary to increase parent company profits. Or, if the subsidiary has a lower dividend payout, the parent may wish to pay a high price to that subsidiary to avoid larger dividend payouts at home. Further, high import tariffs at the parent's country may lead to lower prices at the exporting subsidiary in another country. Likewise, high export tariffs in the subsidiary's country may lead to lower prices as well.