A transfer pricing process is a cost of the transaction between a subsidiary and parent company, or between 2 subsidiaries of the same parent company. For Instance, a company in North American manufacturing tires for buses and other transportation means, and that organization has a fully-owned subsidiary in South America producing rubber plantation in South America. Transfer pricing guarantees the smooth supply of the raw materials to the parent that is required to manufacture the ultimate products, while the subsidiary is assured a reasonable market for its rubber.
Generally, the fixed prices for the product to the prevailing fair market price. Transfer pricing usually encompasses sister companies, it does control one to sell above the market price or buy below the market price. This overpricing and lower pricing reduces the performance level and also boosting the bottom line of others.
A company that manufactures electrical harnesses might be a fully-owned subsidiary of a car manufacturer, but the company might sell the electrical harnesses to match with the competitor car manufacturer particularly at a similar price. This theory is termed as the arm’s length pricing principle, where a parent company should sell at the same pricing to its subsidiaries and divisions as it would sell with an external vendor/ supplier/ party.
Transfer Pricing and the Economy-At-Large
Transfer pricing permits an entity to evade paying income taxes legally when the company sales in one country are transformed into profits in another. This is a practice in multinational drug companies. The tax matters behind transfer pricing are more complicated due to the different tax policies, structure, and implementation. ASC helps on a complex matter related to Transfer Pricing in terms of Analyzing transactions and preparation of Study /Reports, Issuance of Certificates, Evaluating & formalizing APA, Structuring & arrangement, etc.
