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Hi. I am finding it hard to understand Transfer Pricing as i never did F5 (exempt). Does any one have a step by step solution as to how to tackle a Typical TP question? i have the basic knowledge but the calculation part seems a bother.
Hello!
There is wondefull tech article on acca website.
Questions: Landual Lamps (June 13 session) and SSA group (Dec 09)It exists when selling internally within the organisation of different division/business unit across boundaries. It impacted to the global tax effect for a global organisation as well as the performance of the BU manager or division manager. Generally maximum TP is the willing purchase price to be accepted by the buying party and the minimum TP is the willing selling price to be agreed by the selling party. Says division A sells to division B. Material cost $100, variable cost $ 30, fixed cost $ 5. A sells to external customer $160. B can purchase from external supplier is $165. B sells to customer $200.
If A sells to B $130 at cost, A earn nothing lots fixed cost $5 but B earn $70. It’s unfair to A and A will not be considered in selling to B as A can sell $160 with a profit of $25 after deducted the fixed cost.
If A sells to B $160 at market price, A earn a profit of $25 while B earn $40. This seems to be fair to both A & B. A still get the same pay as selling to external customer while B is getting a lower purchase price from external supplier by $5 lower.
The profit earn for a company as whole still no impact as earning $65 ($200 – $135) it just the profit sharing in between A & B of the organisation.
The minimum TP = A’s selling price, ie. $160 market price
The maximum TP = B’s purchase price, ie. $165 market priceI suppose this is something about transfer pricing. Please correct me if I’m wrong.
How does it have an impact to the global tax effect.What if be has its own internal cost Say $20.
Says, A tax rate is 25% while B tax rate is 20%. Higher profit made by A will paying a higher tax to the local authority while B has a better tax advantage. At consolidate level, company is making a higher tax pay and given a lower net profit. This happen for global organisation where A and B at different country/state taxable profit at different tax rate.
The maximum TP accepted by B is not impacted by its internal cost. For division B, they still at a lower purchase cost to buy from A. However, there may perhaps intervention from HQ to have A lower the transfer price to B.
If B internal cost at $20, end up A earn $25 while B earn $20. As above, A tax rate is higher than B by 5%, meaning to say that when consolidated at corporate, will be paying higher tax which suppose maximum B profit will pay lower tax as compared to A.
Tax payable
A = $25 x 25% = $ 6.25
B = $20 x 20% = $ 4.00
Company tax payable = $10.25Says HQ placing TP policy only 10% at total cost.
A sells to B = $148.50
Profit = $13.50
Tax payable = $ 3.375B sells to customer = $200
Profit = $31.50 ($200 – $168.50)
Tax payable = $6.30Company tax payable = $9.675
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