1. Transfer Pricing Mark Fielding-Pritchard 1

2. Why Does TP Have a Bad Name  Basic Scheme Tax in UK is 30%, Tax in India is 40%  Markov makes bicycles in Scotland which cost $5, sells in India for $25  What should be the transfer price?  What if Markov Scotland sells to Markov in Far Far Away (an offshore zone with tax rate 1% for $6 and MFFA sells on to in India for $24?  So tax authorities treat transfer pricing very seriously; and most developing companies have no concept of group relief so even transfers inside the country between group companies will be subject to TP investigations 2

3. Transfer Pricing  For P5 remember ethical considerations  Good transfer price will have elements of  Goal congruence  Fairness  Autonomy Bookkeeping  Minimise tax  In a perfect market transfer price will be market price 3

4. Transfer price negotiated Max price buyer will pay is lower of External purchase price Selling price minus marginal cost Min price seller will take is marginal cost Transfer Price when Seller Has Surplus Capacity 4

5. Transfer price negotiated Max price buyer will pay is lower of External purchase price Selling price minus marginal cost Min price seller will take is marginal cost + lost contribution Transfer Price when Seller Has No Surplus Capacity 5

6. Practical Methods  Market Based  Use market price as adjusted for differences  Cost Based  Cost +  Standard cost  Marginal cost  Full cost  Opportunity cost 6

7. Other Methods  Marginal cost plus a lump sum  Dual pricing 7

8. Q49 SSA a)  Goal congruence  Fairness  Autonomy Bookkeeping  Minimise tax 8

9. Q49 SSA b)  Division A is currently producing 150000 units, therefore there is spare capacity of 10000 units 9 KneeAnkleElbowWristCompetitor Ankle Contribution per unit 1481056

10. Q49 SSA b)  For quotation 1 A has spare capacity so we should manufacture  Transfer price should be variable cost + negotiation (VC=7)  Anticipated TP is $10.50 which is higher than $9. Division B will buy from competitor so use $9 or some negotiated number  For quotation 2 first 10000 should be at variable cost + negotiation, For 8000 it is better to stop producing wrists and manufacture ourselves  I would recommend 18000 units at $9 10

11. Q49 SSA b)  Overall principle is to maximise group profit  Increased sales of ankle units first 10000 units will increase profits by $80000  Contribution per unit is $8 if manufactured and $6 if bought, as wrists generated $5 we should cut wrists and boost ankles  Transfer price needs to be not more than $9 to make it advantageous for B 11

12. Q49 SSA b) ABCompetitor Sales Price10.515 Cost710.59 Contribution3.54.56 18000 units6300081000108000 Tax (40/20/20%) 252001620021600 After Tax Income 10260086400 12 Transfer Price $10.5

13. Q49 SSA b) ABCompetitor Sales Price915 Cost799 Contribution266 18000 units54000108000 Tax (40/20/20%)21600 After Tax Income11880086400 13 Transfer Price $9

14. Q55 Landual lamps a)  What to write?  In general some theory and some specifics  Therefore what makes up good TP policy?  Goal congruence, Fairness, Autonomy Bookkeeping Minimise tax  Housing- costs  Electrical- market prices 14

15. Q55 Landual lamps a)  Housing- costs  Electrical- market prices  Electrical earns 1557- 804-370= 383  However adverse variance of 575k probably means that Electrical is not profitable 15

16. Q55 Landual lamps a)  Housing is based on 8204 + 6902  As full actual costs there is no pressure to reduce costs  No allocated cost is covered 16

17. Q55 Landual lamps b)  The change is from all costs to variable costs  Usually where there are intricate designs overhead is an important component of costs so this would not seem logical without more information 17

18. Value For Money- Non For Profits  No readily available scale exists  How to compare costs and benefits  Timescales  Externalities 18

19. Value For Money 3Es  Economy  Effectiveness  Efficiency 19

20. Value For Money  Goal  Systems Resources  Internal Processes 20

21. Value For Money- Problems  Diverse objectives  Multiple objectives  Politics  Benchmarking (&league tables) 21

22. Value For Money-Target Setting  Central control  Difficulty level  All or nothing  Too many targets  Inappropriate targets  Cost  Ownership  Gaming  Conflict 22