Chap012 - transfer pricing

Chap012 - Transfer Pricing
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Unformatted text preview: McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 12-2 Transfer pricing is the determination of price on the exchange of goods or services between related parties. These transfers are also referred to as intercompany transactions. Upstream transfers go from subsidiary to parent, while downstream transfers are from parent to subsidiary. Transfers also occurs between different subsidiaries of the same parent. A significant proportion of international transactions are intercompany transfers (in 2009 represented 40% of U.S. total goods trade). 12-3 ecentralization and agency problems ecentralized companies are organized by division and division managers have significant authority. his structure decomposes problems into smaller pieces. t also permits local decision making which provides more responsibility for division managers. n agency problem can occur since division managers make decisions in their self-interest. Learning Objective 1 12-4 An effective accounting system can alleviate this agency problem by providing incentives to division managers to act in the interests of the organization. This is referred to as goal congruence. These concepts are relevant to both multinational and purely domestic companies. Learning Objective 1 12-5 erformance evaluation systems ransfer prices directly affect the profits of the divisions involved in an intercompany transaction. ome performance evaluation systems are based on divisional profits. he effectiveness of these performance evaluation systems is influenced by the fairness of transfer prices. Learning Objective 2 12-6 ost minimization rofit maximization and, by extension, cost minimization are important corporate objectives. anipulating transfer prices between countries is one way for multinational enterprises to achieve cost minimization. his is referred to as discretionary transfer pricing . Learning Objective 2 12-7 ost minimization Example adre Inc., a U.S. company, has two subsidiaries, Hijo and Hija. ijo is located in Chile and Hija in the U.S. he tax rate is 17 percent in Chile and 35 percent in the U.S. ijo transfers 100 units of cosa to Hija at a negotiated transfer price of $10 per unit. ...
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