How does CIPS ask questions about transfer pricing?
Transfer pricing is not a key topic in Level 4, but CIPS still askes 1-2 questions on the subject. Transfer pricing refers to prices of goods/ services exchanged between two subsidiaries under the control of a parent company. Its purpose is to allocate profit between related parties within the same group, allowing both entities to optimize the tax costs by shifting profits to countries with lower tax rates. Furthermore, transfer pricing can help a company to reduce duty costs by charging lower prices for imported goods/services.
For example, company A and company B are subsidiaries of a parent company, XYZ. Company A sells a consignment of electronics to company B and charges $25 for each unit of electronic equipment. Company B then sells the equipment to its customers with a price of $100. After deducting other costs (assumed to be $15), the profit before tax is $60. If the corporate income tax in a company B’s country is 20%, so the tax costs per unit of electronic equipment would be $12. In another scenario, if company B’s country imposes a higher corporate tax such as 30%, company A may set a higher transfer price to reduce company B’s taxable profits and overall tax burden.
Besides corporate income tax, company B may incure duty tax when importing goods or services. If the country imposes a high duty tax on imported items, company B may negotiate with a company A to lower the transfer price. By doing so, company B can reduce the amount of duty tax paid to the government, as duty tax is calculated based on the value of imported goods.
In the CIPS exam, they often ask about the purpose of transfer pricing. If you have a clear understanding on the topic, you will able to tackle these questions with ease.
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