The transfer pricing issue is typically portrayed
as a problem of finding the appropriate price or pricing schedule that comes
closest to inducing an efficient level of trade between two divisions of a
firm. Essentially this means that the trade supplies and labour between
departments are aspects to be considered.
It should be noted that the regulation of transfer
prices is important in ensuring that the whole process is conducting in a fair
way. Additionally regulating the transfer prices also plays a major role in
guaranteeing the accuracy of transfer pricing between the entities involved.
Consequently, transfer pricing is viewed as one of
the most important issues related to international tax. As a matter of fact
some analysts in the recent past have concluded that transfer pricing is the
leading edge of what is wrong with international tax (Lee Sheppard, Tax
Analyst, August 2012). This statement however subjective may have some truth in
When it comes to transfer pricing, the prices are
normally set by non- independents associates within the multinational. In such
a case, it is speculated that this form of pricing may not necessarily reflect
an independent market price. The outcome of this is that majority of tax
authorities become concerned in the sense that they worry that the
multinational entities may set transfer prices on cross border transactions to
reduce taxable profits in their jurisdiction. This is also a major explanation
as to why the transfer pricing regulations and enforcement has been on the
Studies in the recent past have estimated that
nearly 60 percent of international trade happens within multinationals.
Essentially what this means is that, despite the fact that international trade
takes place across national boundaries, this mostly happens within the same
corporate group. This explains why transfer pricing goes hand in hand with
various taxation effects and ultimately the global remittance policy.
The aim of this paper is to tackle the basic
methods of transfer pricing. Additionally the study will also cover taxation
effects and the global remittance policy and the role (if any) of transfer
pricing in relation to these aspects.