international marketing

According to an annual survey the prtion of multinationals citing transfer pricing as the most important issue in terms of taxation has grown from one-half to two-thirds, and at the subsidiary level this importance is even more pronounced. Transfer prices can be based on costs or on market prices. The cost approach uses an internally calculated cost with a precentage markup added. In general cost-base prices are easier to manipulate because the cost-base itself maybe anyone of these three full cost, variable cost, or marginal cost. Market conditions in general and those relating to the competitive situation in particular, are typically mentioned as key variables in balancing operational goals and tax considerations. In some market especially in the Far East, competition may prevent the international marketer from pricing will. Prices have to be adjusted to meet local competition with lower labor costs.
Underpricing means that the seller is earning less income then it would otherwise receive in the country of origin and is paying duties on a lower based price on entry to the destination country.
Economic conditions in a market, especially the imposition of controls on movements of funds , may require the use of transfer pricing to allow the company to repatriate revenues.
A new dimension is emerging with the increase in e-commerce activities. Companies have to be particularly explicit on how pricing decision are made to avoid transfer price audits.
International transfer pricing objectives may lead to conflicting objectives especially if the influencing factors vary dramatically from one market to another. Specific policies should therefore exist that would motivate subsidiary managers to avoid making decisions would be in conflict with overall corporate goals.
Three philosophies of transfer pricing have emerged overtime :
1. Cost-base (direct cost or cost-plus)
2. Market base (discounted “dealer” price derived from a market prices)
3. Arm’s-length price, or the price that unrelated parties would have reached on the same transaction. The rationale for transferring at cost is that it increases the profits of affiliates, and there profitablity will eventually benefit the entire corporation. In most cases, cost-plus is used, requiring every affiliate to be a profit center. Deriving transfer prices from the market is the most marketing oriented method because it takes local conditions into account. Arm’s-length pricing is favored by many consituents, such as goverments, to ensure proper intracompany pricing. However, the method becomes difficult when sales to outside parties do not occur in a product category. It is often difficult to convince external authorities that through negotiation occurs between two entities controlled by the same parent. The effect of environmental influences in overseas markets can be alleviated by manipulating transfer prices at least in principal.