IFM 3

10 flashcards · Other · by Daniel F.

1. transfer price

   price one part of a company (e.g., a manufacturing division in Chile) charges another part of the same company (e.g., a sales division in the USA) for a product or service. It's an internal, or "intercompany," transaction. by raising the transfer price for an item sold/moved from low tax country to a high tax country there there will be more profits (shifting profits) in the low tax country, thus lower total tax paid by parent company Treatment is the same as a sale to an outside customer Reven…

2. Problem with profit shifting and transfer price optimization

   Corporation's Goal: Cost Minimization Avoiding withholding taxes on dividends. Getting around restrictions on taking profits out of a country. Minimizing import duties (by setting a low transfer price). Protecting cash from currency devaluations. Division Manager's Goal: Good local performance Agency Problem: A manager will naturally act in their own self-interest. They want their division to look as profitable as possible. High tax division managers do not want their profits shifted away Goal…

3. Arm's-Length Principle

   Governments reaction to profit shifting: The transfer price between two related divisions must be the same price that would have been used if the two divisions were unrelated, independent companies negotiating in a competitive market.

4. Determine Arm's-Length Price

   Comparable Uncontrolled Price (CUP) Method Resale Price Method Cost-Plus Method Comparable Profits Method Profit Split Method

5. Comparable Uncontrolled Price (CUP) Method

   Used when a comparable market price exists. It's the most reliable but often hard to find a perfect match. The "gold standard." The transfer price is based on the price of the same product in a transaction between unrelated parties

6. Resale Price Method

   Used for reselling subsidiaries when affiliate is a sales subsidiary and simply distributes finished goods Transfer Price = Resale Price - Reseller's Gross Margin Find comparable company, find its profit margin, remove it from sale price of original company

7. Cost-Plus Method

   Used for manufacturing subsidiaries when comparable uncontrolled transactions don’t exist and sales subsidiary does more than simply distribute finished goods Transfer Price = Cost of Production + Producer's Gross Markup Find comparable company, find its markup, add to the production price of original company

8. Comparable Profits Method

   Used when other methods do not work well We know distributor sales and operating expenses, we need to determine COGS Find comparable electronics distributor operating profit margin Use it to calculate COGS which is = to transfer price We know the formula: Sales - COGS - Operating Expenses = Operating Profit COGS = Sales - Operating Expenses - Operating Profit

9. Profit Split Method

   Used for highly integrated transactions where it's hard to separate the contributions of each division two related divisions as a single economic unit are treated as one unit The total profit from the final sale is allocated between the two divisions based on the relative value of the functions they each performed

10. When do arms length methods reliability decrease

    CUP Reliability is Reduced: The comparable is a sale from Joal to a wholesaler, but Smith-Jones is a retailer. They operate at different market levels. Furthermore, the products are different: Smith-Jones sells branded bags, while the wholesaler sells unbranded bags. These are major differences that weaken the comparison. Resale Price Reliability is Reduced: The comparable U.S. retailers import from Italy and pay in euros, exposing them to foreign exchange risk. Smith-Jones buys from Mexico in…