Transfer pricing services include the trade of goods or services between two affiliated organizations, and both can come out as the conqueror. Transfer pricing develops business productivity and simplifies the accounting process. Valuable man-hours can be saved with improved productivity and streamlined accounting, leading to greater profitability and focus on business strategy.
What is transfer pricing?
A transfer price is a price imposed among relevant parties in an intercompany transaction. Although intercompany transactions are excluded when consolidating the financial results of controlled foreign corporations and their domestic parents, for tax purposes such entities are not consolidated, and the transactions are therefore not eliminated.
Transfer prices directly affect the allocation of group wide taxable income across national tax authorities. Therefore, a company’s transfer-pricing policies can directly affect its after-tax income to the extent that tax rates differ across national authorities.
Transfer pricing in simple words refers to that price at which divisions or departments within the company transfer products or resources with each other, to get this concept better one should look at the advantages of transfer pricing services-
The benefits of transfer pricing for your business
Cost-saving for departments
It results in cost savings as far departments are concerned because transfer price is normally lower than the market price of the product, hence for example if the multinational company produces batteries as well as mobiles then the mobile division can purchase batteries from the battery division of the company resulting in cost savings for mobile division of the company.
It makes dealings between different departments transparent because in the absence of a transfer price mechanism departmental heads will charge prices arbitrarily resulting in them exploiting the department that requires the product and thus creating animosity between departments which in the long term can create immutable damage to the business.
Another advantage of this mechanism is that since goods are produced in the company itself as far as other departments are bothered they do not have to depend on suppliers as goods are easily available in the company itself which saves the company from the exploitation of the suppliers of the goods.
Transfer pricing services are useful for tax purposes, and therefore, result in tax savings. Tax authorities do not favor such pricing as it helps businesses to lower their tax liability. Transfer pricing utilizes the loopholes in the tax system in different countries and thus is subject to heavy scrutiny from the tax department. With such pricing, a company aims to book more profit in countries that have lower tax rates.
How do transfer pricing services work?
A business requires transfer pricing services when dealing with the divisions, its subsidiary, or an affiliate. When these entities transact with each other, they use transfer prices to manage their expenses.
Usually, a transfer price should not be very different from the market price. In case there is a huge difference, then it is possible that one side is at a disadvantage, or it is to avoid taxes.
Regulations, however, are in place to check and prevent the misuse of the transfer pricing mechanism. These regulations often work on the principle of arm’s length transaction. Businesses must determine the transfer price on the same guidelines; it determines the market price when trading with the outside parties.
At Bispoint Group, our transfer pricing team provides a range of comprehensive business and financial services for small and medium-sized enterprises (SMEs) in Malaysia. We are a dynamic organization of over 70 teams comprising of Chartered Accountants, managers, supervisors, and junior associates serving 1000+ clients in corporate decision-making at all stages of their business needs.
Take a proactive approach towards transfer pricing for your company by speaking to us and learning how we can support your long-term business growth.