Many business people feel understanding quantum physics is much easier than learning transfer pricing.
Yes, transfer pricing is that complex.
To handle it, you need to understand tons of international regulations and calculation methods. So, why should you “torture” yourself learning how transfer pricing works? The idea is to learn ways you can reduce your company’s tax burden.
Read on to learn the top four transfer pricing methods and best practices.
What Is Transfer Pricing?
Transfer pricing refers to the prices of goods/services exchanged between divisions of the same company. Smart companies leverage transfer pricing to reduce the overall tax burden of the parent company. The idea is to charge higher prices to divisions in high-tax regions to reduce net profit and taxes.
You should consult experts to gather more information on transfer pricing to avoid mistakes. The idea is to learn from these experts a given country’s transfer pricing and tax regulations. Also, you need guidance on which transfer pricing method to use.
1. Compared Uncontrolled Price (CUP) Method
The CUP method checks how much a company charges a third party for services/products it sells to its subsidiary. The idea is to use this amount when deciding the transfer price. This method works when a company sells both to its subsidiaries and third parties.
2. The Cost-Plus Method
The cost-plus method calculates how much a division spends to produce the goods it exchanges with another division in the same company. Then add a markup after finding the production cost to decide the transfer price. The goal is to ensure the supplying division earns a reasonable profit.
3. The Comparable Profits Method (CPM)
The CPM methods check the markup (profit) another company in the same industry charge for its products/services. The idea is to rely on these figures to determine the profit margin a division should charge when exchanging goods/services with another division in the same company.
4. The Transaction Profit Split Method (TPSM)
The TPSM is used in complex supply chains or when there are intangible assets. This method doesn’t focus on a single transaction; instead, it looks at the entire supply chain as a whole. It estimates the contributions of each of the parties involved in the chain.
So, a party receives a profit share depending on its perceived contribution. And that’s why the TPSM is less precise than traditional transaction methods, as it works with estimated contributions.
Leverage Transfer Pricing to Reduce Tax Burden
If your business has divisions that exchange goods/services, you need to learn how transfer pricing works. Compare the above transfer pricing methods to decide which one to use. The idea is to choose a method that reduces the parent company’s tax burden to increase profits.
Also, a method that makes it easy to adhere to the taxation regulations.
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