Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Global Pricing Chapter 17

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Objectives of Transfer Pricing Competitiveness in the international marketplace. Reduction of taxes and tariffs. Management of cash flows. Minimization of foreign exchange risks. Avoidance of conflicts with home and host governments over tax issues and repatriation of profits. Internal concerns - goal congruence or subsidiary manager motivation.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Influences on Transfer Pricing Decisions Market conditions in target countries Competition in target countries Corporate taxes at home and target countries Economic conditions in target countries Import restrictions Customs duties Price controls Exchange controls Reasonable profit for foreign affiliates

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Corporate Use of Transfer Prices Three philosophies of transfer pricing are used to achieve corporate objectives –Cost-based: direct or cost-plus (most used) –Market-based: discounted “dealer” pricing –Arm’s-length: same pricing as for unrelated parties Transfer pricing and environmental influences –Attempts to minimize tax liability of subsidiaries in high income tax countries and report profits in lowest tax rate jurisdictions may coincidentally increase other import taxes and duties.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Transfer Pricing Challenges Internal and external problems for the multinational corporation –Performance Measurement The clouding effect of manipulating intra-corporate prices on a subsidiary’s apparent and actual profit performance. Difficulty in maintaining relationships with subsidiaries that are negatively impacted by transfer pricing. –Taxation Tax and regulatory jurisdictions contribute to and compound transfer pricing problems. Pricing that is justified and reasonable in the home country may not be perceived as such in the host country.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Taxation Section 482 of the Internal Revenue Code recognizes four methods to determine arm’s length pricing: –The comparable uncontrolled price method –The resale price method –The cost-plus method –Any other reasonable method

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Arm’s Length Pricing Methods The comparable uncontrolled price method –MNC member sales made to unrelated parties –MNC member purchases from unrelated parties –Sales between unrelated parties The resale method –Pricing determined by subtracting the subsidiary’s profit from uncontrolled selling price. The cost-plus method –Pricing determined by consistently adding a profit markup to the internal seller’s total product cost. Any other reasonable method –Typically the functional analysis approach of comparing the proportional contributions is used.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Pricing Within Individual Markets Determined by: Corporate objectives Costs Customer behavior and market conditions Market structure Environmental constraints

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Pricing Within Individual Markets Corporate Objectives –Profitability (ROI) and competitiveness in the market (market share) –Market situation pricing Skimming Penetration –Product line positioning Premium and mass markets Costs –Resource input costs are a frequently used basis of pricing determinations procurement, manufacturing, logistics, marketing costs

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Pricing Within Individual Markets Demand and Market Factors –The price elasticity of consumer demand strongly affects pricing in markets. –Customer perceptions of product offerings and marketing communications. –Cooperation and strength of intermediaries. Market Structure and Competition –Other competitors in the market affect and limit the strategic responses of marketers to changing market conditions.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Pricing Within Individual Markets Environmental Constraints –Governments policy measures (taxes and tariffs) and price controls influence prices and pricing levels directly. Price controls require marketers to operate as if in regulated industries. Arguments Against Price Controls –The maximum price becomes the minimum price. –In a wage-price spiral, labor turns against restrictions as wage increases are forestalled. –Government controls are difficult to enforce and less tax is raised because less money is made. –Governments may need to bail out companies to prevent bankruptcies and unemployment.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Pricing Coordination Standard worldwide pricing is influenced by: –The need for pricing latitude by subsidiaries faced with localized market conditions. –The large absolute and relative size differences of international markets. –The effect of arbitrage practices in closely located markets is reduced due to the physical distances between many markets. –Parallel imports will surface in markets where price discrepancies exist, regardless of distances.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. The Euro and Marketing Strategy Launch of the Euro –became one and only currency or 12 European nations as of January 1, –requires firms to reexamine business positioning. –will push national markets closer with single currency and single cross-border price. Marketing strategy changes –prices become transparent and require stronger. promotions and education of products to consumers –aim to lower prices as slowly as possible. –price differences reflect quality and service differences.

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Countertrade More than goods, services, or ideas are exchanged in a sale A type of barter arrangement More beneficial to some countries than financial exchange transactions alone Mechanism for firms to gain entry into new markets Long-term sales stability Opens market for uncompetitive goods E-commerce may help develop online global barter economy to increase benefits of Countertrade

Developed by Cool Pictures & MultiMedia PresentationsCopyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Types of Countertrade Counterpurchase or parallel barter –two separate contracts and may include cash –allows for imbalance in value of goods exchanged Buypack or compensation arrangement –supply of technology/equipment to produce goods sold with supplies brand for repayment Clearing arrangements –clearing accounts established deposit/withdraw of countertrade activities - including switch-trading Offset –coproduction, licenses production, subcontracting, technology transfer, overseas investment