Copyright? 2001 by Harcourt,Inc.,All rights reserved,Requests for permissions to make copies of any part of the work should be mailed to
the following address,Permissions Department,Harcourt,Inc.,6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
INTERNATIONAL MARKETING 6e
Global Pricing Strategies
Chapter 18
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-2
Transfer Pricing
The Parent
Corporation
Subsidiary
B
Latin America
Subsidiary
A
North America
Subsidiary
C
Africa
$$$ $$$
The allocation of resources through the
intracorporate pricing of sales to members of
the extended corporate family.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-3
Objectives of Transfer Pricing
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-4
Corporate Use of Transfer Prices
Transfer prices are set by the major financial
officer to achieve corporate objectives.
Transfer price setting approaches
Cost-based approach uses an internally
calculated cost with a percentage markup added.
Market-based approach uses the market selling
price with a discount to the buying division
Cost-based pricing (subject to manipulation)
Full cost
Variable cost
Marginal cost
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-5
Influences on Transfer Pricing Decisions
Market decisions in the foreign country
Competition in the foreign country
Reasonable profit for the foreign affiliate
U.S,federal income taxes
Economic conditions in the foreign country
Import restrictions
Customs duties
Price controls
Taxation in the foreign country
Exchange controls
Source,Jane O,Burns,“Transfer Pricing Decisions in
U.S,Multinational Corporations,” Journal of International
Business Studies 11 (Fall 1980),23-39.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-6
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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-7
Transfer Pricing Challenges
Internal and external problems for the
multinational corporation
Performance Measurement
– The clouding effect of manipulating intracorporate 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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-8
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-9
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-10
Pricing Within Individual Markets
Pricing decisions are determined by
Corporate objectives for 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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-11
Pricing Within Individual Markets… cont’d
Demand and market factors affecting pricing
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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-12
Pricing Within Individual Markets… cont’d
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-13
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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-14
Ethics and Transfer Pricing:
One of US subsidiaries in country X belonging to the ex-
socialist countries is making good money of its soft drink
bottling operation.
The problem is that the country has made the following
restrictions on the company:
a) The subsidiary can’t repatriate 100% of its profit to its
headquarter which is located in New York.
b) The domestic country has levied heavy tax on corporate
earnings.
What strategies would you proposed to the subsidiary in order
to bypass the above difficulties? Are your suggestions within
the ethics and responsibilities of global corporations?
the following address,Permissions Department,Harcourt,Inc.,6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
INTERNATIONAL MARKETING 6e
Global Pricing Strategies
Chapter 18
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-2
Transfer Pricing
The Parent
Corporation
Subsidiary
B
Latin America
Subsidiary
A
North America
Subsidiary
C
Africa
$$$ $$$
The allocation of resources through the
intracorporate pricing of sales to members of
the extended corporate family.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-3
Objectives of Transfer Pricing
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-4
Corporate Use of Transfer Prices
Transfer prices are set by the major financial
officer to achieve corporate objectives.
Transfer price setting approaches
Cost-based approach uses an internally
calculated cost with a percentage markup added.
Market-based approach uses the market selling
price with a discount to the buying division
Cost-based pricing (subject to manipulation)
Full cost
Variable cost
Marginal cost
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-5
Influences on Transfer Pricing Decisions
Market decisions in the foreign country
Competition in the foreign country
Reasonable profit for the foreign affiliate
U.S,federal income taxes
Economic conditions in the foreign country
Import restrictions
Customs duties
Price controls
Taxation in the foreign country
Exchange controls
Source,Jane O,Burns,“Transfer Pricing Decisions in
U.S,Multinational Corporations,” Journal of International
Business Studies 11 (Fall 1980),23-39.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-6
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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-7
Transfer Pricing Challenges
Internal and external problems for the
multinational corporation
Performance Measurement
– The clouding effect of manipulating intracorporate 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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-8
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-9
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-10
Pricing Within Individual Markets
Pricing decisions are determined by
Corporate objectives for 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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-11
Pricing Within Individual Markets… cont’d
Demand and market factors affecting pricing
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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-12
Pricing Within Individual Markets… cont’d
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
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-13
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.
Copyright? 2001 by Harcourt,Inc,All rights reserved,18-14
Ethics and Transfer Pricing:
One of US subsidiaries in country X belonging to the ex-
socialist countries is making good money of its soft drink
bottling operation.
The problem is that the country has made the following
restrictions on the company:
a) The subsidiary can’t repatriate 100% of its profit to its
headquarter which is located in New York.
b) The domestic country has levied heavy tax on corporate
earnings.
What strategies would you proposed to the subsidiary in order
to bypass the above difficulties? Are your suggestions within
the ethics and responsibilities of global corporations?
