Transfer Pricing by Transaction.

A prime objective of intercompany activity is reducing tax liabilities, and the key to this is in controlling transfer pricing. In this way the organization controls the revenue recognized in each tax jurisdiction, and in connection with operating costs, indirectly the profit declared and taxed.

There are circumstances where the transfer price must be evaluated on a per transaction basis. Either because the transfer price evaluation is based on data not available in the period end accounting, or because the regional tax jurisdiction does not accept intercompany accounting based on a period intercompany fee.

Where this method is required, automation of the transfer price and intercompany activity is essential due to the volume of transactions. Evaluating transfer pricing at this level also creates several challenges for a company’s intercompany software solution.

Firstly, the solution needs to be more closely integrated with the host ERP system, as the eventual transfer price needs to be introduced back into the host application as either a journal or invoice.

Secondly, the range of methods by which a transfer price is evaluated, are more numerous. Common pricing methods include cost plus mark-up, intercompany transfer price list, sales value less commission and more. Most transfer pricing methods involve a base price and an adjustment rate, however more complex calculations are often necessary.

The functionality of any solution needs to have the flexibility to automatically evaluate the pricing method appropriate for each business scenario. The decision may rest on different factors from business to business, and cannot be based on predefined lists.

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