Transfer Price Issue

Question 1

What significant outcomes does the setting of transfer pricing impact?

Answer 1

1. Profit recognized by separate units
2. Allocation of taxes between units
3. Measures of separate unit performance

Question 2

In addition to minimizing total income taxesU, what other savings may be accomplished by the setting of transfer prices?

Answer 2

In addition to income taxes, the setting of transfer prices may affect:

1. Withholding taxes, that may apply to the transfer of cash as dividends, interest or royalties.
2. Import duties, which are applied to goods based on transfer prices
3. Profit repatriation restrictions, which limit the amounts of profits that can be transferred out of a country

Question 3

For U.S. income tax purposes, in setting transfer prices, the resulting income should be allocated based on what factors?

Answer 3

1. Functions performed by separate affiliates

2. Risks assumed by separate affiliates

Question 4

Define “transfer price”.

Answer 4

Amount (price) at which goods or serves are transferred between affiliated entities.

Question 5

Identify and describe three major bases for setting transfer prices.

Answer 5

1. Cost: The transfer price is a function of the cost to the selling unit
2. Market Price: The transfer price is based on the price of the good or service in the market (if available)
3. Negotiated Price: The transfer price is based on a negotiated agreement between buying and selling affiliates.