INTERNATIONAL MARKETING 6e Chapter 18 Global Pricing Strategies Copyright 2001 by Harcourt, Inc.. All rights reserved. Requests for permissions to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777
Copyright © 2001 by Harcourt, Inc.. All rights reserved. Requests for permissions to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. INTERNATIONAL MARKETING 6e Global Pricing Strategies Chapter 18
Transfer Pricing The allocation of resources through the intracorporate pricing of sales to members of the extended corporate family. The Parent Corporation Subsidiary Subsidiary Subsidia A B C North America Latin America Africa Copyright 2001 by Harcourt, Inc. All rights reserved 18-2
Copyright © 2001 by Harcourt, Inc. All rights reserved. 18-2 Transfer Pricing The Parent Corporation Subsidiary B Latin America Subsidiary A North America Subsidiary C Africa $$$ $$$ The allocation of resources through the intracorporate pricing of sales to members of the extended corporate family
Objectives of Transfer Pricing Competitiveness in the international marketplace Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange risks o Avoidance of conflicts with home and host governments over tax issues and repatriation of profits Internal concerns- goal congruence or subsidiary manager motivation Copyright 2001 by Harcourt, Inc. All rights reserved 18-3
Copyright © 2001 by Harcourt, Inc. All rights reserved. 18-3 Objectives of Transfer Pricing Competitiveness in the international marketplace Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange risks Avoidance of conflicts with home and host governments over tax issues and repatriation of profits Internal concerns - goal congruence or subsidiary manager motivation
Corporate Use of Transfer Prices Transfer prices are set by the major financial officer to achieve corporate objectives Transfer price setting approaches Cost-based approach uses an internally calculated cost with a percentage markup added Market-based approach uses the market selling price with a discount to the buying division Cost-based pricing(subject to manipulation Fu∥cost Variable cost Marginal cost Copyright 2001 by Harcourt, Inc. All rights reserved 184
Copyright © 2001 by Harcourt, Inc. All rights reserved. 18-4 Corporate Use of Transfer Prices Transfer prices are set by the major financial officer to achieve corporate objectives. Transfer price setting approaches • Cost-based approach uses an internally calculated cost with a percentage markup added. • Market-based approach uses the market selling price with a discount to the buying division Cost-based pricing (subject to manipulation) • Full cost • Variable cost • Marginal cost
influences on Transfer Pricing decisions Market decisions in the foreign country Competition in the foreign country Reasonable profit for the foreign affiliate U.S. federal income taxes Economic conditions in the foreign country Import restrictions Customs duties o Price controls Taxation in the foreign country EXchange controls Source: Jane O Bums, "Transfer Pricing Decisions in Copyright 2001 by Harcourt, Inc. All rights reserved U.S. Multinational Corporations, Joumal of Intemational Business Studies 11(Fall 1980): 23-39 18-5
Copyright © 2001 by Harcourt, Inc. All rights reserved. 18-5 Influences on Transfer Pricing Decisions Market decisions in the foreign country Competition in the foreign country Reasonable profit for the foreign affiliate U.S. federal income taxes Economic conditions in the foreign country Import restrictions Customs duties Price controls Taxation in the foreign country Exchange controls Source: Jane O. Burns, “Transfer Pricing Decisions in U.S. Multinational Corporations,” Journal of International Business Studies 11 (Fall 1980): 23-39