The Complete CFO Handbook

Chapter 13. Transfer Pricing

Agenda

Item 1	Define transfer pricing and explain the four criteria for evaluating different transfer pricing methods.
Item 2	Compute transfer prices using the cost, cost plus, negotiated price, and market price methods.
Item 3	Understand the computation of and need for a synthetic market price method.
Item 4	Describe a dual transfer pricing system.
Item 5	Understand the tax issues associated with transfer pricing by corpo‐rations operating in more than one country.
Item 6	Describe the various methods that are acceptable for determining the arm's‐length price in international transfer pricing.

Many companies today are structured on some variation of vertical integration in which the fnished product of one responsibility center becomes the raw material of another responsibility center. For example, in a paper manufacturing company the output of the paper division may be sold to outside customers or may be transferred to other company plants that manufacture paper bags or corrugated boxes. Here the problem of intra‐company transfer pricing arises. Several different transfer pricing methods are in use, each with its own advantages and disadvantages.

A transfer price is the dollar basis used to quantify the transfer of goods or services from one responsibility center to another. Transfer pricing is an important topic. The explosive growth in most companies as a result of either internal expansion or external mergers has accelerated the trend toward decentralization and ...