Two transfer pricing principles exist in Company A:

Markdown: selling price is the reference, The transfer price is set in a way to leave a target margin in the selling entity

Cost-plus: Cost of goods sold is the reference. The transfer price is set in a way to leave a target margin in the production entity

CASE STUDY:

Country A

The production unit is based in country A

Cost of goods sold =100

Enterprise Income Tax (EIT) =20%

Country B

The trading entity is based in country B

Selling price=200

EIT=40%

You have a choice between setting transfer price on the basis of markdown or cost-plus

Markdown: you leave 30% target profit in Country B (transfer price equals 70% of selling price), the rest of the profit is made in country A

Cost-plus: you set transfer price at cost of goods sold +4%

WHICH SOLUTION IS MORE INTERESTING FROM A TEX SAVING POINT OF VIEW?

ARE WE FREE TO SET TRANSFER PRICES ACCORDING TO TAX SAVING SCHEMES?

Answer rating: 100% (QA)

Country A Cogs 100 Add 4 markup 4 Total selling price Transfer price ... View the full answer