Transfer Pricing Methods and Benefits

Transfer pricing refers to the ‘transfer price, intra corporate price, or the price of a good or service sold by one affiliate to another, the home office to an affiliate or vice verse’. [1] There are two types of Exports in goods and services in International Trade. The first type, which is a typical export, involves exports by a seller to an ‘unrelated’ buyer. The second type of Export, which is a special kind, is the intracorporate export. This involves the seller or exporter selling to its’ own affiliate or subsidiary across borders. Intracorporate sales or exports arise as Multinationals attempt to rationalize production by requiring subsidiaries to specialize in the manufacture of some products while importing others. Their imports may consist of components that are assembled into the end product, such as ashtrays made in one country that are mounted in car bodies built in another, or they may be finished products imported to complement the product mix of an affiliate or subsidiary. The issue with these two types of export is the difference in prices. The price for regular exports (sales to unrelated entities) tend to be normal thus cost plus margin but the price for ‘intracorporate’ exports tend to ‘controlled’ or ‘anomalous’. In the eyes of tax authorities intracorporate sales are ‘manipulated’. Intra-corporate prices are generally manipulated for various reasons, some of which are reduction of income taxes, import duties and the avoidance of exchange controls. These manipulations, according to the U.S government are costing its treasury shortfalls in the hundreds of millions of dollars annually. A survey conducted in 1992, for one instance, examined 1, 174 tax returns filed by Mexican-controlled firms operating on the American side of the border and found that 70 percent claimed a loss in 1992 due to ‘bogus’ transfer pricing. [2]