Designing and implementing effective transfer pricing systems in organizations

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.

Conclusion

To be effective, transfer pricing systems must confront the issue of resistance to change first, and then create the necessary interprocess and system integration points to make the entire strategy effective. Of the approaches which can be used for defining transfer pricing, the market price-based approach is the most effective. This approach allows for companies to benchmark their competitiveness relative to outside organizations and also makes the comparison process for internal departments and divisions more comparable.