(66)---The pros and cons of different transfer pricing bases.

The pros and cons of different transfer pricing bases.

A transfer price at market value is usually encouraged by the tax and customs authorities. Of the host and home countries as they will received a fair share of the profits made but there are problems with its use.
Prices for the same product may very considerably from one country to another.
Changes in exchange rates, local taxes and so on can result in large variations in selling price.
A division will want to set its prices in relation to the supply and demand conditions present in the country in question to ensure that it can complete in that country.

• A transfer price at cost is usually acceptable to tax and customs authorities since it provides some indication that the transfer price approximates to the real cost of supplying the item and because it indicates that they will therefore received a fair share of tax and tariff revenue. Cost-based approaches do not totally remove the suspicion that the figure may have been massaged because the choice of the type of cost (full actual, full standard, actual variable, marginal) can later the size of the transfer price.

• In a multinational organization, negotiated transfer price may result in overall sub-optimization because on account is taken of factors such as differences in tax and tariff rates between countries.