Transfer Pricing and Responsibility Centres

Transfer pricing and responsibility centres
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Transfer pricing and responsibility centres
Transfer pricing is understood the method that is employed in selling products from one subsidiary to another subsidiary within a business organization. It occurs when 2 companies which are part of the same transnational corporation trade with each other (Boyd, 2010). A case in point is when a UK-based subsidiary of Pepsi purchases something from a Germany-based subsidiary of Pepsi. When the parties in the transaction establish a price for that transaction, then it is referred to as transfer pricing. Transfer pricing basically impacts the subsidiaries’ purchasing behaviour and might have income tax implications for the business organization as a whole.
Even though it is not illicit or necessarily abusive in itself, what is abusive or unlawful is transfer pricing manipulation or transfer mispricing. Stuart (2009) stated that transfer mispricing is essentially a kind of a more common phenomenon referred to as trade mispricing, which includes trade between parties that are not related, for instance re-invoicing. Roughly 60% of global trade takes place within, instead of between transnational corporations and governments lose a considerable amount of tax revenue because of transfer pricing.
A responsibility centre refers to a set of resources and/or activities that are assigned to a subunit manager. It is worth mentioning that reporting upward is done by using responsibility accounting – the manager of the subunit is responsible for only those resources or activities which the manager controls (Kafafy, 2013). There are 4 kinds of responsibility centres: Investment centre – the manager has control over operating assets, revenues, as well as costs. Profit centre – the manager has control over revenue and costs. Revenue centre – the manager has control over revenue only. Cost centre – manager has control over costs only (Kafafy, 2013).
A transfer price, as Walther (2014) pointed out, is an internal charge which is established primarily for exchanging services and/or goods between responsibility centres within a business organization. For purposes of external reporting however, these prices are eliminated. In essence, when services and/or goods are transferred across different responsibility centres and performance of the responsibility centres is measured, then a transfer price has to be calculated for the item that has been transferred (Khan Academy, n.d). The main technique...