Two transfer pricing principles exist in Company A: Markdown: selling price is the reference, The transfer price
Question:
Two transfer pricing principles exist in Company A:
Markdown: selling price is the reference, The transfer price is set in a way to leave a target margin in the selling entity
Cost-plus: Cost of goods sold is the reference. The transfer price is set in a way to leave a target margin in the production entity
CASE STUDY:
Country A
The production unit is based in country A
Cost of goods sold =100
Enterprise Income Tax (EIT) =20%
Country B
The trading entity is based in country B
Selling price=200
EIT=40%
You have a choice between setting transfer price on the basis of markdown or cost-plus
Markdown: you leave 30% target profit in Country B (transfer price equals 70% of selling price), the rest of the profit is made in country A
Cost-plus: you set transfer price at cost of goods sold +4%
WHICH SOLUTION IS MORE INTERESTING FROM A TEX SAVING POINT OF VIEW?
ARE WE FREE TO SET TRANSFER PRICES ACCORDING TO TAX SAVING SCHEMES?
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen