Opportunities and challenges by multi-national companies in setting an Essay

Opportunities and challenges by multi-national companies in setting an appropriate transfer price - Essay Example One of such implications that come with inappropriate transfer pricing, as mentioned above, is the possibility of the transfer-in subsidiary making a loss or just no profit at all on the sale of the products received from the parent subsidiary. If for example the parent subsidiary manufactures a certain product at a cost of say $700 and transfers it to the distributer in another country at a cost $800, it shall have made a positive contribution of $100. Depending on the market price, the distributer may incur another variable cost of $100 and sell the product at $1000. In this case, the manufacturer has made a profit while the distributer has not. Therefore, one side will be motivated while the other will be demoralised. Nonetheless, both sides will be required to pay tax. There is, therefore, a need to set up an appropriate transfer price that does not favor one side of an enterprise. The fact that these subsidiaries exist in different locations with different tax jurisdiction creates a complex puzzle for the MNE. It has always been a challenging task to come up with a plausible method of setting up the most appropriate transfer pricing that accommodates all these contrasting tax jurisdictions. In most host nations, when a subsidiary transfers goods to another, the local governments usually view the buy-in subsidiary as a target customer from whom to siphon revenues. This perception has led to mandatory taxation on the sales of such goods even if no considerable profit has been realised. It should be noted that the subsidiary from which the goods were transferred had also been taxed the authority under which it operates. Therefore, these two corporate have been taxed for the very product. This is called double-taxation. Double taxation is a liability to any MNE and may deter the realisation of net profit (ACCA, 2009). The principle of Arm’s Length had been proposed to resolve