Advantages And Disadvantages Of Transfer Pricing

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TRANSFER PRICING – IS IT FAIR TRADE ? Transfer pricing is the process in which the price for goods and services which are sold between related legal entities within an enterprise are set in a fair way . For eg , if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price . This also includes those few legal entities that are considered under the control of a single corporation which can also include branches that are completely owned by the parent company .But there are certain rules and regulations that allow certain entities to be under a single control if both the entity and the controlling company share few family members on their board of directors. Transfer pricing is an effective way as an indication of a MNC’s net profit ( or loss ) before tax in front of the operational countries of the company as this type of pricing is used as a profit allocation method . Due to this transfer pricing helps to set prices among different entity or divisions within an enterprise . A major advantage of transfer pricing is it’s ability to act as a major tool for the major issue of corporate tax avoidance which is also referred as Base Erosion and Profit Sharing ( BEPS ) . If we look at the basic essence , a transfer price should be equal to either of the two , what the seller…show more content…
Transfer prices are abusive if the cost of purchases in countries with a high tax rate is inflated (overbilling) or the profits from sales are artificially reduced (underbilling).Countries with low tax rate face huge profits whereas countries with high tax rateface increased costs . In this way the company reduces its tax pressure in the high-tax-country and makes profits in the low-tax-country. The company’s total tax burden decreases. This means that intra-corporate transfer prices should be calculated in the same way as prices between independent
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