Transfer Pricing Implementing Transfer Pricing:

Transfer Pricing Implementing Transfer Pricing: Concepts and Strategies The development and refinement of transfer pricing systems is growing as a result of continued globalization and decentralization of operations within organizations. Globally today companies struggle with the defining of a transfer price, with market price-based approaches being the most preferred yet the most difficult to implement (Wolff, 2007). Transfer pricing systems have proven to be effective in increasing the level of inter-company trading and transactions yet must be specifically designed to minimize and eventually alleviate cultural, costing, and process-based limitations.

Considerations in Designing an Effective Transfer Pricing System Ultimately the greatest benefit of having an effective transfer pricing system is the ability to force divisions and departments to control costs in an effort to be more market-price competitive (Wolff, 2007), ensuring the best possible price for other divisions (Sijmonsbergen, Carey, Schmid, 2007). Organizations have found that introducing this level of competitiveness significantly increased transfer pricing accuracy and efficiency as a process (Wolff, 2007).

The approaches used within organizations to define transfer pricing include the market price-based approach (Wolff, 2007), negotiated price approach (Crow, Sauls, 1994) and the cost price approach which takes into account both fixed and variable costs (Sijmonsbergen, Carey, Schmid, 2007). Of these, market price-based transfer pricing systems are the most desirable in that the pricing can be benchmarked external to the company to evaluation of competitiveness.

For companies trading across international borders, the issue of managing tariffs and duties of inbound shipments as defined by the local governments also makes market-based transfer pricing more attractive in that it provides clarity of pricing structures as well. Implementing an Effective Transfer Pricing System Where many organizations fail at implementing transfer pricing systems is the resistance to change becomes so significant that any new process or procedure gets ignored, then fails to achieve its intended purpose.

Addressing resistance to change needs to be a foundational strategy in the development of any new information technology (IT), process and certainly person-based change (van Dijk, van Dick, 2009). For a transfer pricing system to be effective then it must first seek to get all the key stakeholders involved who are critical to its success. Next, the project management teams implementing the transfer pricing system need to benchmark existing processes, systems and pricing methodologies to evaluate their relative strengths and weaknesses (Sijmonsbergen, Carey, Schmid, 2007).

Documentation of the processes and the planned improvements, including the methodologies for defining market-based pricing are completed. These are often process flow diagrams that provide insight into the extent of the change planned to ensure the organization can accomplish transfer pricing successfully and profitability. Next, often organizations will complete pilots of their transfer pricing systems to validate interprocess and intersystem integration points (Sijmonsbergen, Carey, Schmid, 2007).

Often pilots will run 90 days or longer, at the end of which they are evaluated in terms of system integration, interprocess communications and person's roles relative to the daily functioning of the transfer pricing system being clarified. Underscoring all of these factors is the need for ensuring change management programs and strategies are in place to provide those departments most affected with ownership of the system and a say in how the processes impacting their jobs will be changed over time (van Dijk, van Dick, 2009). Conclusion To be effective, transfer.