Chapter 17
Global Pricing
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Objectives of Transfer Pricing
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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.
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Influences on
Transfer Pricing Decisions
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Market conditions in target countries
Competition in target countries
Corporate taxes at home and target countries
Economic conditions in target countries
Import restrictions
Customs duties
Price controls
Exchange controls
Reasonable profit for foreign affiliates
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Corporate Use of Transfer
Prices
• Three philosophies of transfer pricing are used to
achieve corporate objectives
– Cost-based: direct or cost-plus (most used)
– Market-based: discounted “dealer” pricing
– Arm’s-length: same pricing as for unrelated parties
• Transfer pricing and environmental influences
– Attempts to minimize tax liability of subsidiaries in high
income tax countries and
report profits in lowest tax rate
jurisdictions may coincidentally
increase other import taxes
and duties.
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Transfer Pricing Challenges
• Internal and external problems for the multinational
corporation
– Performance Measurement
• The clouding effect of manipulating intra-corporate prices
on a subsidiary’s apparent and actual profit performance.
• Difficulty in maintaining relationships with subsidiaries
that are negatively impacted by transfer pricing.
– Taxation
• Tax and regulatory jurisdictions contribute to and
compound transfer pricing problems. Pricing that is
justified and reasonable in the home country may not be
perceived as such in the host country.
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Taxation
• Section 482 of the Internal Revenue Code recognizes
four methods to determine arm’s length pricing:
– The comparable uncontrolled price method
– The resale price method
– The cost-plus method
– Any other reasonable method
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Arm’s Length Pricing Methods
• The comparable uncontrolled price method
– MNC member sales made to unrelated parties
– MNC member purchases from unrelated parties
– Sales between unrelated parties
• The resale method
– Pricing determined by subtracting the subsidiary’s profit from
uncontrolled selling price.
• The cost-plus method
– Pricing determined by consistently adding a profit markup to
the internal seller’s total product cost.
• Any other reasonable method
– Typically the functional analysis approach of comparing the
proportional contributions is used.
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Pricing Within
Individual Markets
Determined by:
• Corporate objectives
• Costs
• Customer behavior and market conditions
• Market structure
• Environmental constraints
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Pricing Within
Individual Markets
• Corporate Objectives
– Profitability (ROI) and competitiveness in the market
(market share)
– Market situation pricing
• Skimming
• Penetration
– Product line positioning
• Premium and mass markets
• Costs
– Resource input costs are
a frequently used basis of pricing determinations
• procurement, manufacturing, logistics, marketing
costs
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Pricing Within Individual
Markets
• Demand and Market Factors
– The price elasticity of consumer demand strongly
affects pricing in markets.
– Customer perceptions of product offerings and
marketing communications.
– Cooperation and strength of intermediaries.
• Market Structure and Competition
– Other competitors in the market affect and limit the
strategic responses of marketers to changing
market conditions.
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Pricing Within Individual
Markets
• Environmental Constraints
– Governments policy measures (taxes and tariffs) and
price controls influence prices and pricing levels
directly. Price controls require marketers to operate as
if in regulated industries.
• Arguments Against Price Controls
– The maximum price becomes the minimum price.
– In a wage-price spiral, labor turns against restrictions
as wage increases are forestalled.
– Government controls are difficult to enforce and less
tax is raised because less money is made.
– Governments may need to bail out companies to
prevent bankruptcies and unemployment.
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Pricing Coordination
• Standard worldwide pricing is influenced by:
– The need for pricing latitude by subsidiaries faced
with localized market conditions.
– The large absolute and relative size differences of
international markets.
– The effect of arbitrage practices in closely located
markets is reduced due to the physical distances
between many markets.
– Parallel imports will surface in markets where
price discrepancies exist, regardless of distances.
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The Euro and Marketing
Strategy
• Launch of the Euro
– became one and only currency or 12 European nations
as of January 1, 2002.
– requires firms to reexamine business positioning.
– will push national markets closer with single currency
and single cross-border price.
• Marketing strategy changes
– prices become transparent and require stronger.
promotions and education of products to consumers
– aim to lower prices as slowly as possible.
– price differences reflect quality and service differences.
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Countertrade
• More than goods, services, or ideas are exchanged
in a sale
• A type of barter arrangement
• More beneficial to some countries than financial
exchange transactions alone
• Mechanism for firms to gain entry into new markets
• Long-term sales stability
• Opens market for uncompetitive goods
• E-commerce may help develop online global barter
economy to increase benefits of Countertrade
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Types of Countertrade
• Counterpurchase or parallel barter
– two separate contracts and may include cash
– allows for imbalance in value of goods exchanged
• Buypack or compensation arrangement
– supply of technology/equipment to produce goods sold
with supplies brand for repayment
• Clearing arrangements
– clearing accounts established deposit/withdraw of
countertrade activities - including switch-trading
• Offset
– coproduction, licenses production, subcontracting,
technology transfer, overseas investment
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