Week 12 Flashcards
International Business Framework
- Host / Home countires, we produce an item in one country and transfer it to an other country
- Regulations on transfering products
- Risks
- Legal part
Organisation Structure
-> decentralisation
Total decentralisation means minimum constraints and maximum freedom for managers at the lowest levels of an organisation to make decisions.
Multinational companies -> subunit managers
Organisation Structure
-> centralisation
Total centralisation means maximum constraints and minimum freedom for managers at the
lowest levels of an organisation to make decisions.
-> no delegeation
-> most of the companies are somewhere in between
-> idea decentralisation
Benefits of decentralisation
Benefits of decentralisation include:
* Creates greater responsiveness to local needs
* Leads to gains from quicker decision making -> can be diffrent form country to country
* Increases motivation of subunit managers
* Aids management development and learning
* Sharpens the focus of subunit managers
-> What type of XX do Siwss people like?
-> Responsiveness to diffrent needs? -> quiker decision making if the company has regional managers, the regional managers is more motivated if we has more freedom in decision making -> economic mindset
-> Organic growth of management, the regional manageres feels more motivated
Costs of decentralisation
Costs of decentralisation include:
* Leads to suboptimal decision making (incongruent or dysfunctional decision making due to loss of control)
* Focuses manager’s attention on the subunit rather than the organisation as a whole
* Increases costs of gathering information -> everyone has a seperate excel file, it does take a lot of time to collect the figures
* Results in duplication of activities -> marketing for every country
Multinational corporations are often decentralised because centralised control of a company with subunits in
three or four different continents is often physically and practically impossible.
-> Incongruent decision making -> reginal manager does dysfunctional decision
-> if I’m manager for Starbucks in Switzerland I’m focused on Switerland and my subunit and not to the company as a whole
4 diffrent types of responsibility centres within a decentraliced company
There are four types of responsibility centres:
1. Cost centre – the manager is accountable for costs only. -> IT Support
2. Revenue centre – the manager is accountable for revenues only. -> sales department, measured on how much you sell, client facing
3. Profit centre – the manager is accountable for revenues and costs. -> the managers will be accountable for revenue and cost / Production Department that sells its products
4. Investment centre – the manager is accountable for investments, revenues and costs. -> Capital investments, we going to expand, North America devision, closer to the CEO (Managers of Starbucks Switzerland)
Each of these responsibility units can be found in either centralised or decentralised organisations.
−> Profit centres can be coupled with a highly centralised organisation, and cost centres can be coupled
with a highly decentralised organisation
Transfer pricing
A transfer price is the price one subunit charges for a product or service supplied to another subunit of the same organisation.
* The transfer price creates revenues for the selling subunit and purchase costs for the buying subunit, affecting each subunit’s operating profit. -> could be a service or a product
Intermediate products are the products transferred between subunits of an organisation.
* Intermediate products can either be processed further by the receiving subunit or be resold to an external customer.
Private banking
We need a lawyer for the cusomer. The (interntal) lawyer comes in and charge the private banking unit.
Transfer-pricing methods
three gernal methods
Different transfer-pricing methods produce different operating profits for individual subunits.
* In determining transfer prices, management may choose to use the price of a similar product or service publicly listed (market-based transfer price). -> market based transfer price
* Management may choose a transfer price based on the costs of producing the product (cost-based transfer price). -> how much does this costs me + margins -> cost based transfer price
* In some cases, the subunits of a company are free to negotiate the transfer price between themselves and then to decide whether to buy and sell internally or deal with outside parties (negotiated transfer prices). -> manager of diffrent subunits negotiate about the price -> negotiated transfer price -> Negotiation -> between market-based and cost-based
-> The chosen transfer-pricing method should ideally lead each subunit manager to make optimal decisions for the organisation as a whole.
-> challenges: legal issues, power strugles, taxes
Key criteria of transfer prices
- Promote goal congruence, so that division managers acting in their own interest will take actions that are aligned with the objectives of top management. -> it’s good for the company as a whole
- Help top managers evaluate the performance of individual subunits. -> how well has a manger made his decisions
- Induce managers to exert a high level of effort. Subunits selling a product or service should be motivated to hold down their costs; subunits buying the product or service should be motivated to acquire and use inputs efficiently.
- Preserve autonomy of subunits if top managers favour a high degree of decentralisation. A subunit manager seeking to maximize the operating income of the subunit should have the freedom to transact with other subunits of the company (based on transfer prices) or to transact with external parties.
Profitability
- the divistion
- company as a whole
- capacity
- market
Market-based transfer prices
In a perfectly competitive market, there is no idle capacity.
− Division managers can buy and sell as much as they want at the market price.
− A perfectly competitive market exists, when there is a homogeneous product with equivalent buying and
selling prices and no individual buyers or sellers who can affect those prices by their own actions.
Market prices also serve to evaluate the economic viability and profitability of divisions individually.
Setting the transfer price at the market price motivates division managers to deal internally and to take the same actions as they would if they were dealing in the external market.
By using market-based transfer prices in a perfectly competitive market, a company can achieve the following:
1 Goal congruence
2 Management effort
3 Subunit performance evaluation
4 Subunit autonomy.
-> it checks all the box of the transfer pricing
-> positive -> win-win for the subunit and the whole company
Cost-based transfer prices
If the marked price doen’t exist -> we use cost-based
Cost-based transfer prices are helpful when market prices are unavailable, inappropriate, or too costly to
obtain.
− Many companies use transfer prices based on full costs (Variable Cost + Fixed Cost).
− To approximate market prices, cost-based transfer prices are sometimes set at full cost plus a margin. (112%)
-> The margin is very debatable
General guidelines
Minimum transfer price
= Incremental costs per unit incurred up to the point of transfer
+ Opportunity costs per unit to the selling division
The ‘correct’ transfer price depends on the economic circumstances and the decision at hand.
-> short term all variable costs / long term full cost
Dual pricing
There is seldom a single cost-based transfer price that simultaneously meets the criteria of goal congruence,
management effort, subunit performance evaluation and subunit autonomy.
− Dual pricing is using two separate transfer-pricing methods to price each interdivision transaction.
Each subunit use their favoured transfering price method!
Dual pricing is not widely used in practice even though it reduces the goal-congruence problem associated with a pure cost-based transfer-pricing method.
Prorating
Man nimmt externen Preis (max Preis) und interner Preis (Min Preis nur VK) und rechnet die Differenz aus, diese verteilt man dann prozentual entsprechend der variablen kosten der jeweiligen subunit
Beispiel
Externer Preis -> 23.00
Interner Preis -> 19.00
= Diffrenz 4.00
VK Transportation -> 2000.00
VK Refining -> 4000.00
1/3 Anteil Transportation -> 1.33
2/3 Anteil Refining -> 2.66
Strabucks illegall multinational transfer pricing
- Overcharged the swiss coffe bean company paying for strange things
-> lower the profits - Overcharge the UK -> unsual royalty
- low rate taxrate in the Netherlands
Apple
Apple moved their profits to the Apple subsidiary in Ireland, there they have lower taxes
Multinational transfer pricing
Current studies – Horvath 2023
cost based -> Cost plus
prorating / negotiated -> profit split, Tansational net margin
market based -> resale price, other
-> erstaunlich market based ist am niedrigsten, obwohl beste variante
The distribution of foreign tax authorities with a critical view of tansfer pricing has barely changed
- n = 105 SME
- Companies are consistent in designing their transfer pricing systems
- The topic of transfer pricing remains high on the agenda
- Primary motivation for transfer pricing remains legal compliance for tax purposes and NOT optimizing tax efficiency
- Difficult to defend the transfer pricing system against the tax authorities without income adjustments despite best intentions
- Use of supporting IT systems to support transfer pricing management remains very limited – transfer pricing processes are largely manual
- Many companies still accept double taxationcost based -> Cost plus
prorating / negotiated -> profit split, Tansational net margin
market based -> resale price, other
-> erstaunlich market based ist am niedrigsten, obwohl beste variante
EY International Tax and Transfer Price Survey (2021)
EY International Tax and Transfer Price Survey (2021) concludes:
− 65% of companies expect the number of transfer pricing audits to rise over the next 3 years.
− 61% of companies will likely change their approach to transfer pricing in the next two
years.
− 62% of companies have fewer than 11 people handling transfer pricing matters
− Changes in transfer pricing being driven by:
− Global tax reform
− Global supply chain reconfiguration
− The rise of controversy and changes in
enforcement behavior
− Digital transformation
Multinational transfer pricing
OECD - BEPS
nicht auswendig können, aber wissen das wenn man in der OECD ist, das man es dann einhalten muss
BEPS (Base Erosion Profit Shifting) refers to tax planning strategies that exploit gaps and mismatches in tax
rules to artificially shift profits to low or no-tax locations resulting in:
− Little or no corporate tax being paid.
− Annual revenue losses for governments of at least USD 100 – 240 billion, equivalent to 4 – 10% of global
corporate income tax revenue.
