Performance Management and Control - Essay Example

Introduction Transfer pricing is a phenomenon which is gaining prominence in the globalized world due to the different tax regimes and regulatory capacity which has helped organizations to save on taxes (Emmanuel and Mehafdi, 2004). Transfer pricing is being carried with the objective of ensuring optimal decision making within the decision making process. Organizations need to develop and find out a process for allocating cost and overheads so that the strategies can be framed for transfer prices of different goods and services. This paper looks to evaluate the perspective of transfer pricing from different directions and explain the same with different advantages so that the manner and the impact of transfer pricing can be determined. This will also help to find out the manner in which transfer pricing helps in tax evasion and will look at providing complete details and guidance regarding the manner in which the business process is carried out. Transfer Pricing: Overview Transfer pricing is a profit allocation method where multinational companies look at attributing their net profits to location where they don’t carry business. This is a process which results in setting up prices between different divisions in an enterprise. It is imperative that the process of transfer pricing ensures that the organizations charges the same price which will he charged to the customers (Chan & Chow, 2001). This helps to provide the price or value which will be attributed to each division. Thus, transfer pricing is a mechanism which will help one division of the company to charge a price to another division based on the transfer of products and services between the two divisions. Transfer pricing thereby helps to cover the different aspects like analysis, documentation, and adjustments of charges which is created among parties (Mehafdi, 2000). Since, cost and overhead are matters which are subjective so it provides an opportunity to ensure discretion among them while allocating the same for different products and services. This thereby provides an opportunity to manipulate the cost and overhead which thereby brings a change in the transfer pricing and provides an opportunity to be able to save on taxes. This is seen especially in countries with high tax rates where organizations look at attributing their profits to countries to lower tax countries so that taxes can be saved through the mechanism of transfer pricing. An example will help to understand it better. Suppose GE is commissioned with the objective of developing a new power station. This means that the entire work will be carried out by GE. Since, GE specializes in generators so it will be able to provide the same easily but for other things like light fixture and shifting technology GE will purchase the same from other service providers. This will be done through the process of transfer pricing and GE after procuring and using it will sell the same to the final customers for the designated price to the person who has contracted the project and not sell it in the open market (Shih, 2006). Transfer pricing is thereby sending and supplying goods from one department to another so that the different process of carrying out different activities and the overall gain from it can be identified for the business. Advantages of Transfer Pricing Transfer pricing provides different benefits and advantages to the organization as it helps to work on different functionalities and enhances the overall performance. The different benefits which are gained from transfer pricing are as follows Transfer pricing ensures that no actual cash flows between the different divisions and instead only entries in the respective books are made as transfer pricing is an expense for the division which receives the goods and revenues for the division which supplies the goods (Emmanuel and Mehafdi, 2004). Transfer pricing has an impact on the profits being made by different divisions but doesn’t impact the total profits of the organization unless international transfer pricing takes place (Emmanuel and Mehafdi, 2004) The different departments or division which are involved in the process of transfer pricing remains independent of each other which thereby ensures that the mechanism of transfer pricing provides the required benefits The different departments which are engaged in the process of transfer pricing have better information pertaining to the cost and benefit which the organization is able to get due to the process of transfer pricing. Helps organization to take advantage of taxes as transferring goods and services to other departments and organization saves on taxes which thereby helps to ensure financial gains for the business. Disadvantages of Transfer Pricing Transfer pricing has certain disadvantages and demerits which hinders the overall process and makes it difficult to carry out the different functions effectively. Some of the disadvantages associated with transfer pricing are as follows Lack of goal congruence among the different managers within the organization at times results in delaying the process of communication and thereby makes it difficult to deal with the different needs and requirements of the business (Colbert and Spicer, 2005) A situation is created where the top management doesn’t have all the relevant information which will facilitate the process of decision making and would thereby have an impact on the process of decisions which are taken (Colbert and Spicer, 2005) The cost of obtaining information is very high as every department will have to be communicated regarding the accounting entries that have to be posted, the cost structure and other filing required. Transfer pricing results in a situation where differences among the different departments is witnessed which thereby results in lack of coordination and increases the risk for the business as understanding the entire process of transfer pricing is very cumbersome. Purpose of Transfer Pricing Organizations indulge in the process of transfer pricing for different reasons and purposes which they deem fit. This thereby aims towards multiplying the overall dimensions and gains as organizations are able to utilize the different things to their advantage. Some of the purposes of transfer pricing is as follows It helps to generate profits for each division and department which provides an opportunity to access the performance of each department and find out the areas which need to be worked on and thereby provides an opportunity to work on the gaps (Anctil and Dutta, 2009) Organizations through the process of transfer pricing are able to coordinate different activities like production, sales, and different pricing decisions (Anctil and Dutta, 2009). This helps to improve the process of control and provides a directive through which management is able to improve the overall functionality of the different departments It helps the organization to generate the profits differently for different departments which thereby multiplies the effectiveness and ensures that the working capability of the business improves (Anctil and Dutta, 2009). Transfer pricing will also have an impact on the reported profits for each centres but the overall profits will remain the same for organization unless they get involved in international transfer pricing (Anctil and Dutta, 2009). Organizations thereby based on different needs and requirements indulge in the process of transfer pricing which helps to ensure that transfer pricing provides maximum gains. Conclusion Transfer pricing is thereby a mechanism which are adopted by organization to save on taxes as highlighted in the paper. The mechanism of transfer pricing provides different advantages to the business and provides an opportunity through which multinational corporations can pass on the profits to other destinations where they don’t work but have a low corporation tax. In addition to it the paper also provides the different purposes based on which transfer pricing takes place and the overall relevance it has for business process. References Anctil, R. and Dutta, S. (2009). Transfer pricing, decision rights and divisional versus firm-wide performance evaluation. The Accounting Review, (79), 591-615 Chan, K.H., & Chow, L. (2001). International Corporate environments and transfer pricing: Year empirical study off Clouded in has developing economy framework. Newspaper off Accounting and Research Business, 31, 103-118 Colbert, G.J and Spicer, B.H (2005). With multi – box investigation off has theory off transfer pricing process. Accounting, Organizations and Society (20), 423-456. Emmanuel, C and Mehafdi, M. (2004). Transfer pricing. Academic close London 112-129. Mehafdi, M. (2000). The ethics off international transfer pricing, Newspaper off Business Ethics, 28 (4), 365-381 Shih, H. (2006). optimal transfer pricing method and fixed cost allowance ABACUS (32)178 - 189 Read More