Method of Transfer Pricing

Transfer pricing refers to the price of good and services that a company provides to itself. Firms with multiple divisions or subsidiaries might deal with transfer pricing. The rise of multinational firms in the age of globalization has increased the use of transfer pricing. Transfer pricing methods must conform to international guidelines and local tax regulations so that a company can properly allocate its profits and avoid double taxation. Transfer pricing has six standard methods of use.

• 1

  Determine the fair market value. The fair market value price is the one that would have been agreed to had the two divisions or two parties within the company not been related. Utilize the price of the same goods and services sold to an outside buyer. This method is known as the comparable uncontrolled price method.

• 2

  Determine the resale value of the product. If the intracompany buyer does not add value to the product before sale, the resale cost of the good can be used as a basis for determining taxable income.

• 3

  Determine the cost to produce the good or provide services. Add a percentage gross profit markup to the cost to determine price. This is known as the cost-plus method.

• 4

  Estimate the profits of a similar transaction between other taxpaying entities. Use the comparable-profits method to determine how much profit your company would have earned on the same transaction. This method requires analyzing third-party company financial documents.

• 5

  Combine the total profits between the shareholders of the company. Allocate a profits ratio between shareholders that is similar to that of similarly situated companies. This method is called the comparable profit split method.

• 6

  Confirm the overall profit of the company. Split the profit between the company divisions in accordance with their function. This method is known as the residual profit split method.