Transfer Pricing System Transfer Pricing

¶ … Transfer Pricing System

Transfer Pricing Article Review

Supply chains, given their many interrelationships, pricing scenarios and costs, are fertile for defining how to define transfer pricing both within suppliers and between suppliers and producers. The article A general unconstrained model for transfer pricing in multinational supply chains (Villegas, Ouenniche, 2008) is the basis of the analysis presented in this paper. The scope of the peer-reviewed article is ambitious as it attempts to define an operating framework which includes parameters for tariffs, government costing, and balance of trade through currency valuations between nations. All of these factors are taken into the context of a multinational supply chain (MNSC) that requires tight synchronization to function correctly.

Analysis of Transfer Pricing Scenarios Presented

The authors (Villegas, Ouenniche, 2008) have done an impressive amount of work in the literature review in this article, classifying studies and empirical research of the effects of income taxes, import tariffs, finished goods, intermediate products, primary trade, secondary trade, exchange risk and many other factors too numerous to list here, yet comprehensive in its analysis of their effects on transfer price theory. Table 1, Summary of survey provides the analysis and listing of key contributions by researchers. Through a series of transfer models, the authors also attempt to ascertain a statistically significant level of causality between factors that would denote market-based pricing transfers between MNSC divisions relative to cost-based ones. The analysis also provides insights from the authors; research in terms of Joint-Ventured-based transfer pricing methodologies and approaches. The specific correlational model of tax divisional earnings paid by host country takes into account a statistical model of production costs, purchasing costs, import tariffs, transport costs and duty drawbacks. These models are in turn lined to other correlational and Chi Square-based models to isolate which factors lead organizations to choose one transfer pricing model over another.

The conclusion the authors reach is that tax allocation penalties within countries are effective in redefining strategies used by companies for defining transfer pricing systems. Further, the analysis shows that transfer pricing outcomes are more uniformly decided on both an import and export perspective based on Withholding taxes on Dividends, Withholding taxes on Imports, Transfer Costs, and Trade Quantities. All of these factors taken together provide insights into how transfer pricing systems impact the P&L statements immediately in the period of the transaction. Table 2, Relationships in MNSC problem provide an analysis of these factors in the form of a decision matrix of transfer prices, transport cost allocations and trade quantities from an import and expert standpoint (Villegas, Ouenniche, 2008).

This is one of the more useful aspects of this article, in that it extrapolates the near-term decisions of transfer pricing systems directly and materially into the financial reporting of the firm in the same fiscal period. There is also the quantification of the MNSC purely from the effects of cross-supplier and supplier-buyer collaboration which gets much coverage in the industry press, yet lacks the quantification from a financial standpoint this article provides. The quantification of MNSC-based decisions purely on transfer pricing that is market-based leads to higher levels of volatility and uncertainty of earnings yet also gives firms a great control over the competitiveness of fulfilling their own demand over time. The authors point out that there is a material effect of market-priced transfer pricings if the originating division has the ability to trim costs significantly over time and attain business process management (BPM) objectives for process re-design followed by Business Process Rengineering9BPR) and the reduction of losses due to uncompetitive pricing.

Limitations