In transfer pricing, the capital of one enterprise is used in another enterprise. That means management of one company can control another company. The main objectives are separate profits and performance is evaluated separately.
Secondly, it affects allocations of company resources. In this method cost incurred in one enterprise can be utilized in another enterprise.
The main purposes for transfer pricing are as follows −
Methods of transfer pricing are as follows −
Requirements for transfer pricing are as follows −
These methods are explained below −
Cup method − compares terms & conditions, price of a transaction to 3rd party transactions.
Resale price − price where an associated enterprise sells a product to a 3rd party.
Cost price method − compares gross profits to cost of sales.
TNMM (Transactional net margin method) − determines net profit of controlled transactions of associated enterprises.
Profit split method − terms & conditions are examined by determining divisions of profits.