Transfer Pricing by Period Accounting

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.

A commonly used technique is often referred to as ‘Cost Plus’ or ‘Tax Agreements’. These processes are usually based on the period operating expenses, and either a proportion of the period sales revenue or a mark-up on operating costs.

The transfer price in this case is expressed as an accumulated intercompany ‘Fee’ for the period concerned. The most basic evaluation of this fee can be a simple mark-up on designated elements of operating costs, or can include proportions of revenue with various methods of apportionment, or can be complex multi-tier calculations involving historical data.

These are often executed on a period basis, but depending on circumstances can be executed quarterly or even annually. In some cases with period based schemes final accounts are unavailable when the intercompany fee needs to be paid. To overcome this limitation organizations often make a ‘forecast’ payment based on previous actuals. Then subsequently make a ‘true-up’ payment in the following period based on actuals, less payments made to date.

The two main benefits of this method are:

  • The intercompany fee is evaluated as a single value for each trading relationship, rather than for each transaction, and is thus more open to evaluation through a spreadsheet application.
  • It takes into account the operating costs of the subsidiary and therefor more accurately reflects profit rather than simply apportioning revenue.
However not all tax authorities allow this method of handling intercompany accounting, and require transfer pricing to be evaluated on a transaction by transaction basis.

Free consultation
If your company is an Oracle E-Business Suite user and would value a confidential discussion with a senior member of Virtual Trader’s Intercompany and Transfer Pricing team, please Click Here