Top 5 Types of International Transfer Pricing Processes

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After the great success of International-Transfer-pricing, using which big TP orders were imposed on companies having international operations in the financial year 2011-12, the government of India has expanded its reach for the next one by incorporating "Specified Domestic Transactions" in the Transfer-Pricing (TP) regulation.

Be it global or DTS, it is the pricing of products and services exchanged in the transactions of intra corporate purchase.

The Domestic Transfer Pricing Methods are quite different than international TP. Let's consider the types of international transfer-pricing-methods that are mostly used in global marketing.

Transfer at Cost

The companies that are relying on the transfer-at-cost method realize that transactions by global associates contribute to profitability by getting scale economies in pan india manufacturing operations. It incurs lower costs leading to better affiliate performance, and finally benefits the entire organization.

This process helps in keeping duties at a minimum. The organizations relying on this approach do not expect any profit on transfer sales; instead it expects that the associate will generate the revenue by subsequent resale.

Cost Plus Pricing

Enterprises that consider the cost-plus pricing process are of the notion that the profit must be displayed for any service or product at every phase of activity through the corporate system. This approach may lead to a price that is entirely irrelevant to the demand conditions in global markets, still several exporters rely on this approach.

Market based TP

This type of transfer-price stands for the price needed to be competitive in the global market. The major constraint is the cost in this approach. There are many a variation in defining the costs. To facilitate market-based transfer prices to capture a new small market to support regional manufacturing, third-country sourcing can be required. This helps a company to earn a name or franchise in the market cost effectively without making any major investment in opening any branch.

Arm's Length Transfer-Pricing

This type of pricing is approached by unrelated organizations in a similar transaction that is called as "arm's-length" TP. It requires recognizing an arm's-length cost that could be quite tough except in the case in which the transaction is of commodity-type products. This pricing method can be used if it is considered as a range of prices not as a single point.

Tax Regulations and TransferPrices

As the global corporations do business in a world having various corporate tax rates, there is a way to maximize system income in nations having the lowest tax rates and to minimize income in high-tax nations. Of late, several countries have strived to optimize national tax revenues by evaluating business returns and mandating reallocation of expenses and incomes.

Synopsis

Above mentioned are some of the most widely used global TP process that are mostly used by companies dealing in global transactions.
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