At a Glance
Operational transfer pricing is critical to global value chains for multinational corporations. It determines contractual prices at which goods and services are transferred between different legal entities within the same group.
The processes involved in setting transfer prices can be complex and subject to disruption, making it vital that your business understands the basics of operational transfer pricing.
Familiarize yourself with disruption and control factors for operational transfer pricing processes to support effective business accounting strategies.
What is Operational Transfer Pricing?
Operational transfer pricing refers to the pricing of transactions between different legal entities within a multinational corporation (MNC). These transactions can include the transfer of goods, services, intellectual property, or other assets between subsidiaries, branches, or divisions of an MNC.
Operational transfer pricing is important because it helps MNCs allocate costs and profits among their various legal entities in a way that aligns with their overall business strategy. It also helps MNCs manage their global tax obligations by allowing them to strategically place expenses in specific tax jurisdictions.
To set operational transfer prices, MNCs must follow specific guidelines and principles, such as the arm’s length principle, which states that transfer prices should be set as if the entities involved were independent parties dealing with each other at “arm’s length.” This helps ensure that transfer prices are fair and reasonable and do not result in tax avoidance or evasion.
Despite these guidelines, the operational transfer pricing process can still be disrupted.
Factors That Can Disrupt Operational Transfer Pricing Processes
Various factors can disrupt operational transfer pricing processes, such as:
- Changes in market conditions, including shifts in demand or changes in the cost of goods and services.
- Shifts in business strategy can impact the decision to enter a new market or expand into new product lines.
- Regulatory changes such as shifts in tax laws or anti-trust regulations.
MNCs must be aware of these changes and adjust their transfer pricing policies accordingly.
How to Execute Effective Operational Transfer Pricing
Effective operational transfer pricing is critical for MNCs to manage their global value chains and tax obligations. Key strategies for executing effective operational transfer pricing include:
Understand Finance and Accounting Regarding Intercompany Pricing
A strong understanding of finance and accounting principles by the MNC staff is essential for setting accurate and fair transfer prices. This includes understanding how to allocate costs and profits among different legal entities and how to account for transactions involving intangible assets, such as intellectual property. Then, an MNC Finance and Accounting staff must accurately document the pricing information for SEC or other reporting disclosure purposes.
Consider Global Tax Regulations
MNCs must also be aware of global tax regulations when setting transfer prices, as these regulations can significantly impact the prices that are set. For example, some countries have stricter transfer pricing rules, making it more challenging for MNCs to shift profits between different legal entities.
Know Your Third-Party Contracting Agreements and Supply Chain Activities
MNCs should also be aware of third-party contracting agreements and supply chain activities that may impact operational transfer pricing. For example, if an MNC has a contract with a supplier that includes specific pricing terms, these terms may need to be considered when setting transfer prices. These terms may also be utilized in the future as the basis for setting prices.
Develop Internal Controls for Transfer Pricing Workflows and Policies
To ensure that operational transfer pricing is being handled consistently and in compliance with relevant regulations, MNCs should develop internal controls and policies for transfer pricing workflows. This may include creating a centralized system for tracking and documenting intercompany transactions and establishing clear guidelines for setting transfer prices. Making someone or a department responsible for setting prices can also be required at some point.
Predict How Business Disruptions May Impact Intercompany Pricing Policies
Finally, MNCs should be prepared for disruptions that may impact their operational transfer pricing processes. This may include predicting how changes in market conditions, shifts in business strategy, or regulatory changes may affect intercompany pricing policies. By anticipating and planning for potential disruptions, MNCs can be better prepared to maintain control over their operational transfer pricing processes.
Steps for Improving Your Company’s Operational Transfer Pricing Processes
Improving your MNC’s operational transfer pricing processes can help you see more efficiency and profitability. Practical first steps for improving operational transfer pricing include the following:
- Analyze current processes
Take a close look at your current operational transfer pricing processes to identify any inefficiencies or areas for improvement. Pay particular attention to transactions that involve significant manual processes or require frequent adjustments to adhere to policies.
- Identify key personnel
Determine which individuals or teams are responsible for managing manual transfer pricing processes, as they may have valuable insights into how to streamline these processes.
- Prioritize areas for improvement
After identifying pain points and inefficiencies, prioritize the areas that most benefit from an enhanced operational transfer pricing plan.
- Evaluate technology needs
Consider how well your internal teams are adept at using technology and whether providing them with new tools and technologies would be feasible.
- Consider technology solutions
Evaluate the potential costs and benefits of implementing more advanced technology solutions for operational transfer pricing.
- Simplify policies
Look for opportunities to simplify transfer pricing policies while achieving the same economic outcomes for your company’s related entities. This can help streamline processes and improve efficiency.
Work with Windes for a Robust Transfer Pricing Tax Strategy
By understanding the factors that can disrupt operational transfer pricing and implementing strategies to maintain control over these processes, your MNC can effectively manage its global value chains and tax obligations.
If your company is looking to improve its operational transfer pricing processes, the Windes team can help. With a focus on strengthening accounting and tax strategy, Windes’ business accounting services can help your company streamline its operational transfer pricing processes and improve efficiency.
Contact Windes to learn more about our business accounting services that will strengthen your company’s tax strategy and accounting.