Sanjivani College of Engineering, Kopargaon

Department of MBA

205 Enterprise Performance Management

Unit No.3 DIVISIONAL TRANSFER PRICING

Presented By:
Prof.Pooja.S.Kawale
MBA(Financial Management), B.com(Cost & Works
Accounting)
Assistant Professor, Dept. of MBA
www.sanjivanimba.org.in
www.sanjivanimba.org.in 1
 TransferContents
Pricing Methods

• Transfer Pricing Meaning

• Transfer Pricing Methods-Cost Based-Cost Plus -Negotiated --
-Market based
• Contribution Based
• Transfer Pricing & Goal Congruence
• Resolving Transfer pricing conflicts

www.sanjivanimba.org.in
 Transfer Pricing
Transfer pricing refers to the pricing of goods, services, or intangible assets that
are transferred within or between different entities of the same multinational
enterprise (MNE). In other words, it is the price charged for transactions
between related parties, such as a parent company and its subsidiaries or
between different subsidiaries of the same parent company.
• The main purpose of transfer pricing is to determine the fair market value of
the goods, services, or intangible assets being transferred between related
parties. This is important because if the transfer price is not at arm's length
(i.e., the price is not similar to what unrelated parties would have paid for
similar goods or services), it can be used to shift profits from one tax
jurisdiction to another, resulting in lower taxes being paid overall.
• Transfer pricing is a critical issue for multinational companies as they strive
to balance the needs of different tax authorities while maximizing profits for
shareholders. As such, many countries have developed specific rules and
regulations to ensure that transfer pricing is conducted in a fair and
transparent manner.
www.sanjivanimba.org.in
Transfer Pricing

www.sanjivanimba.org.in
 Transfer Pricing Methods

• There are several methods used to determine transfer prices for transactions between related
parties. These methods are generally classified into two categories: traditional transaction
methods and transactional profit methods.
• Traditional Transaction Methods: a) Comparable Uncontrolled Price (CUP) method: This
method compares the price charged for the transaction between related parties to the price
charged for similar transactions between unrelated parties. b) Resale Price Method (RPM):
This method considers the resale price of a product or service that has been purchased from a
related party and then resold to an unrelated third party. c) Cost Plus Method (CPM): This
method adds a markup to the cost of producing the product or service to arrive at a transfer
price.
• Transactional Profit Methods: a) Transactional Net Margin Method (TNMM): This method
compares the net profit margin of a related party to the net profit margin of comparable
transactions between unrelated parties. b) Profit Split Method (PSM): This method divides the
overall profit earned from a transaction between related parties based on the relative
contributions of each party.
• Each method has its strengths and weaknesses and may be more appropriate depending on the
specific facts and circumstances of the related-party transaction. Therefore, it is important to
carefully analyze the nature of the transaction and choose the most appropriate transfer
pricing method to arrive at a fair and reasonable transfer price.

www.sanjivanimba.org.in
 Transfer Pricing Methods

• Cost-Based Method: This method determines the transfer price based on the cost of
production of the goods or services being transferred. The cost-based method is
straightforward and easy to apply, but it may not reflect the true market value of the goods or
services being transferred.
• Cost-Plus Method: This method determines the transfer price by adding a markup to the cost
of production. The markup represents the profit margin that the selling division expects to
earn on the transferred goods or services. The cost-plus method is more complex than the
cost-based method, but it provides a better reflection of the true market value of the goods or
services being transferred.
• Negotiated Method: This method determines the transfer price through negotiation between
the selling and buying divisions. The negotiated method is flexible and allows for a transfer
price that reflects the specific circumstances of the transaction. However, it can be time-
consuming and may not be feasible for all transactions.
• Market-Based Method: This method determines the transfer price based on the
price of similar goods or services in the open market. The market-based method
provides the most accurate reflection of the true market value of the goods or
services being transferred. However, it can be difficult to find comparable
transactions in the open market, particularly for unique or specialized goods or
services.

www.sanjivanimba.org.in
 Transfer Pricing Methods
• Contribution-based transfer pricing is a method of determining the transfer price of
goods or services based on their contribution to the profitability of the overall
company. Under this method, the transfer price is determined by allocating a
portion of the overall profit to the division or subsidiary that produces or sells the
goods or services being transferred.
• The contribution-based transfer pricing method is often used when the goods or
services being transferred are unique or have a significant impact on the overall
profitability of the company. For example, if a subsidiary produces a specialized
component that is critical to the production of the company's main product, the
transfer price may be determined based on the contribution of that component to the
overall profitability of the company.
• The contribution-based transfer pricing method can be more complex than other
transfer pricing methods because it requires a detailed analysis of the contribution
of each division or subsidiary to the overall profitability of the company. This
analysis may involve allocating costs and revenues between different divisions or
subsidiaries, and may require the use of complex accounting methods.

www.sanjivanimba.org.in
• One potential benefit of the contribution-based transfer pricing method is that it can
align the incentives of different divisions or subsidiaries with the overall goals of
the company. By tying the transfer price to the contribution of each division or
subsidiary to the overall profitability of the company, the contribution-based
method can encourage divisions or subsidiaries to focus on activities that are most
beneficial for the company as a whole.
• However, the contribution-based transfer pricing method may also be subject to
greater scrutiny from tax authorities, who may question the allocation of profits and
expenses between different divisions or subsidiaries. As with other transfer pricing
methods, it is important to carefully document the analysis and assumptions
underlying the contribution-based transfer pricing method to ensure compliance
with tax regulations.

www.sanjivanimba.org.in
Goal Congruence

www.sanjivanimba.org.in
 Goal Congruence
• Goal congruence refers to a situation where the goals of different individuals or
entities within an organization are aligned and mutually supportive. It is the state in
which the objectives and targets of various departments, teams, and employees are
compatible and contribute to the overall objectives of the organization.
• When goal congruence exists, the efforts and actions of individuals or units work
together harmoniously towards achieving a common purpose. It means that
everyone is on the same page, pursuing objectives that are consistent with the
broader organizational goals and strategies.
• Goal congruence is essential for the smooth functioning and success of an
organization. When there is alignment between individual and organizational goals,
it can lead to increased coordination, cooperation, and collaboration among
employees and teams. It helps in minimizing conflicts, promoting teamwork, and
fostering a sense of shared purpose.

www.sanjivanimba.org.in
 Goal Congruence
• In contrast, if there is a lack of goal congruence, conflicting objectives can arise,
leading to competition, thinking, and inefficient resource allocation. Misalignment
of goals can result in suboptimal decision-making, decreased productivity, and an
overall negative impact on organizational performance.
• Achieving goal congruence often requires effective communication, clear goal
setting, and a shared understanding of the organization's vision and mission. It
involves ensuring that individual goals are aligned with departmental goals, which
in turn are aligned with the overall objectives of the organization. Regular
monitoring, feedback, and performance evaluation can also help in maintaining
goal congruence over time.
• In summary, goal congruence refers to the alignment of individual, team, and
organizational goals, enabling everyone to work in harmony towards achieving
common objectives. It plays a crucial role in promoting organizational
effectiveness, teamwork, and overall success.

www.sanjivanimba.org.in
Transfer Pricing Audit Process

www.sanjivanimba.org.in
Thank You
www.sanjivanimba.org.in