...When you’re planning your project, risks are still uncertain: they haven’t happened yet. But eventually, some of the risks that you plan for do happen. And that’s when you have to deal with them. There are four basic ways to handle a risk: Avoid The best thing that you can do with a risk is avoid it if you can prevent it from happening, it definitely won’t hurt your project. For example, your company has found a new building for a great price but it is in a high crime area, in this case it would be best to avoid the purchase. Mitigate If you can’t avoid the risk, you can mitigate it. This means taking some sort of action that will cause it to do as little Damage to your project as possible. Unfortunately you have to venture out in the rain which may cause you to sleep and fall. How you can mitigate having an accident would be to wear slip resistant shoes and carry an umbrella. Transfer One effective way to deal with a risk is to pay someone else to accept it for you. The most common way to do this is to buy insurance. Nobody can predict when a car accident will happen, that is why you purchase car insurance like All State or Geico. Accept When you can’t avoid, mitigate, or transfer a risk, then you have to accept it. But even when you accept risk, at least you’ve looked at the alternatives and you know what will happen if it occurs. We all know that in the event of a hurricane, in most cases there is very little you can do to mitigate the damage, so you would...
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...Catastrophe Bonds Financial markets are consistently changing as new opportunities arise and others die off. Catastrophe bonds are an example of a new market opportunity that had not been thought of before. Catastrophe bonds can be defined as a high-yield debt instrument that is usually insurance linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake. One of the advantages of catastrophe bonds is that they are not linked to the stock market or the poor economic conditions occurring today. The emergence of catastrophe bonds occurred because of the large losses insurance companies suffered following Hurricane Andrew. A catastrophe bond deal occurs as; “an insurer will issue a bond whose returns are tired to the likelihood of one or more natural disasters over a certain period of time. If the event does not happen, investors earn a yield on the bond. But the principle can be wiped out if a devastating storm does strike,” (Ahmed). The catastrophe bond can be beneficial to the insurance company when a natural disaster occurs because they now have more money on hand due to the investors. It can also be very beneficial for investors when a natural disaster does not occur and they earn a relatively high yield compared to other securities. The main issue with the catastrophe bond as both an insurance company and an investor is that the likelihood of a natural disaster is entirely random and cannot be predicted through any mathematical formula...
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...currency bitcoin to increase the speed, and slash the price, of international money transfers, raising the prospect of a revolution in the $600bn annual global remittance market. Soaring rates of mobile phone use in developing countries are helping the entrepreneurs compete with more usual forms of money transfer in countries where remittance rates and fees are highest. Many of the world’s poorest people depend on money sent to them from friends and family abroad. According to World Bank figures for 2011, nearly half of Tajikistan’s GDP is derived from remittances, while in Liberia, Lesotho, Nepal and Haiti they account for more than a fifth of GDP. Entrepreneurs claim they are using bitcoin to give some of the world’s poorest people a better deal on the money they receive from abroad. The World Bank calculates the average fee on remittances at 8%, yet charges can be three times as high. A report from the Overseas Development Institute (published in April 2014 , said the benefits of remittance transfers “are lost in intermediation as a result of high charges. Africa’s diaspora pays 12% to send $200 – almost double the global average.” Bitcoin could also cut the time it takes to send remittances. BitPesa, a Kenyan mobile money transfer firm that launched in May, says its remittance transactions are “twice as fast and 75% cheaper” than competitors, because it uses bitcoin to transfer funds. Elizabeth Rossiello, BitPesa’s founder and CEO, said: “We’re looking to bring...
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...Transfer Pricing Kim: “I ... don’t understand why it would make sense to pay $450/ton for pulp [to buy internally from Northwestern’s U.S. pulp mills] when I can get it for $330/ton from Chile.” Ewing: “I understand your motivation for wanting to source the pulp from Chile, but it is important [to buy inside] for the corporation to act as an integrated team.” Barrett and Slape (2000: 597) Executive summary The quote above is an excerpt from a phone conversation between Bill Ewing, the Vice President of Northwestern Paper Company 1, and Arthur Kim, the Director of Northwestern’s South Korean subsidiary. This conversation rises questions on the advantages and disadvantages of utilizing internal transfer prices. Such as: given that some subsidiaries are located in lower tax jurisdictions, would it not be logical to set lower internal transfer prices to those subsidiaries? Would it not be logical to allow the Korean subsidiary to purchase from outside suppliers given that internal transfer prices are much higher than market prices in Chile? Allowing subsidiaries to outsource externally would lead to the bankruptcy of the US subsidiaries, which would not have enough demand for their products? What are the advantages and disadvantages of a reward system based on the allocation of internal consumption? Is the allocation process “fair” to each subsidiary? Is it “fair” to the company as a whole? Questions and doubts on transfer pricing probably haunt not only Mr. Ewing and the Northwestern...
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...3 Effects of Exchange Rates On International Transfer Pricing Decisions Canri Chan (E-mail: canri.chan@miis.edu), Monterey Institute of International Studies Steven P. Landry (E-mail: steve.landry@miis.edu), Monterey Institute of International Studies Terrance Jalbert (E-mail: jalbert@hawaii.edu), University of Hawaii at Hilo Abstract Events leading to the passing of the Sarbanes-Oxley Act have led to increased concern with and scrutiny of potential management manipulation of financial statements. From an agency theory perspective, managers have incentives to manipulate organizational methods and choices in order to produce financial statements that those managers believe will maximize their incentive compensation. Transfer pricing represents one possible choice that managers can manipulate. This paper investigates whether exchange rates affect transfer pricing particularly as it relates to maximizing overall corporate profitability. The effects of taxes and government regulations have been explored in considerable depth in the transfer pricing literature. However, while transfer prices should also be affected by exchange rates in predictable ways, this variable has received comparably little attention in the literature. Inclusion of exchange rates in an analysis of transfer pricing and corporate profitability presents an opportunity to add to the literature. We conducted an experiment to examine how managers set transfer prices. We found that, while individuals were influenced...
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...Introduction Transfer pricing has long been an important cost management topic for transactions among domestic subsidiaries. The concern is to promote actions and behaviors that seek to maximize the corporate performance and profitability rather than the subsidiary performance. Unlike transfer pricing between two divisions of the same company, this transactions between subsidiaries cross international boundaries, involve tax issues concerning the determination, analysis and adjustment of prices between this related entities. I. Transfer price 1. Transfer price definition The transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associate enterprises. They are the prices charged for any transaction between affiliates entities. This transfer may be commercial, financial or technical. According to the OECD, two companies are associated if one of the enterprises participates directly or indirectly in the governance, management, control or the capital of the other or if the same persons participate directly or indirectly to the management, control or the capital of both enterprises. They can be defined simply as transactions prices between companies of the same group and resident in different states. This type of transactions involves intra-group transactions crossing borders. Example: Within a MNE group, a subsidiary A established in France sells computers to another subsidiary B established...
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...Transfer pricing By John C. Hollas Illustration: Susanna Denti How to apply the appropriate transfer pricing methods to intercompany financial transactions In Canada, taxpayers are seeing an increased scrutiny of and more audit focus on intercompany financing transactions by the international tax auditors from the Canada Revenue Agency. The related party financial transaction being most commonly audited by the CRA are intercompany loans, factoring of trade receivables and provision of financial guarantees. This environment of rising transfer pricing controversy risk with respect to intercompany financial transactions conflicts directly with the multinational corporation's (MNC) increasing need to finance its foreign operations through intercompany, crossborder financial transactions. The transfer pricing risks and implications remain very significant both from a tax compliance standpoint and from a controversy risk management perspective. Today, MNCs need to mitigate the risk of significant transfer pricing adjustments by local and foreign tax authorities. While our focus is limited to the Canadian tax environment, it is critical to recognize that in all international related party transactions, with financial transactions being no exception, the transfer pricing issues include the other tax jurisdictions of the foreign related parties that are involved in the intercompany transaction. As such the transfer pricing legislation in those foreign tax jurisdictions must...
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...submitted Table of Contents Transfer pricing 3 Methods of fixing transfer price 4 1. Market based transfer prices 4 Buyer 4 Seller 4 Group 5 Conclusion 5 2. Full cost transfer prices 6 Buyer 6 Seller 7 Group 7 Conclusion 7 3. Cost-plus a mark-up transfer prices 8 Buyer 8 Seller 9 Group 9 Conclusion 9 4. Negotiated transfer prices 10 Buyer 10 Seller 10 Group 11 Conclusion 11 References 12 Transfer pricing Transfer pricing is the establishing the price of goods that are sold between related legal entities in a company. It is practiced by centralized organizations to monitor the transfer of products or service from one division of the company to another (O'brien & Oates, 2007). For example, the six segments of the General Electric Company are trading amongst themselves (General Electric Company, 2006). Methods of fixing transfer price Market based transfer prices The external market prices for the intermediate products are used to set the transfer price. The strategy presumes that the acquiring division will secure the products from the manufacturing division at the same price as in the external market. Although the external market is usually rarely or never accessed, the competitive price determines the minimal intra-organization transfer price (Feinshreiber, 2004). General Electric uses...
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...considered to be the easiest way of entering foreign markets. Exporting can be either indirect or direct. In general, the advantages of exporting are: i) manufacturing is home based, hence it is less risky that overseas based, ii) gives an opportunity to “learn” overseas markets before investing in bricks and mortar, and iii) reduces potential risks of operating overseas (FAO, 1997). Some of the disadvantages are: i) limited profit potential, ii) company gains no market information, or experience in new markets, iii) plants may not be located in low cost locations, iv) high transport costs, v) tariffs tend to be highest on finished goods, and vi) loss of control as markets are distant form production (http://uwf.edu/rsjoland/12%20Market%20Entry%20Strategies%20as%20Used%2004%201.pdf). b. Licensing – method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor. The following are the advantages and disadvantages of this strategy. Advantages | Disadvantages | 1. Provides opportunity to low risk manufacturing relationships | 1. Disclosure of accumulated competitive knowledge and experience | 2. Capital not tied up in foreign operation | 2. Creates possible future competitors | 3. Access to difficult markets | 3. Lack of control over license operations | 4. Improved delivery and service levels in local markets...
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...length price. * The CUP method is the most direct way of ascertaining an arm’s length price. It involves the direct price comparison for the transaction of a similar product between independent parties. * Comparability Analysis * An uncontrolled transaction is comparable to a controlled transaction for purposes of the CUP method if one of the following conditions is met: * None of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the price in the open market; or * Reasonably accurate adjustments can be made to eliminate the material effects of such differences. * An MNE using the CUP method to determine its transfer price must first identify all the differences between its product and that of the independent manufacturer. The MNE must then determine whether these differences have a material effect on the price, and adjust the price of products sold by the independent manufacturer to reflect these differences, to arrive at an arm’s length price. A comparability analysis under the CUP method should consider amongst others the following: * Product characteristics such as physical features and quality. * If the product is in the form of services, the nature and extent of such services provided. * Whether the goods sold are compared at the same points in the production chain. * Product differentiation in the form of patented features...
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...Technology Transfer to China: Guidance for Businesses Technology Transfer to China - Why Worry? Many European companies are keen to come to China. While in the past, European companies came to China to take advantage of low-cost manufacturing for export, more recently, they have come to enter the Chinese domestic market, establish R&D, engage in cooperative development, take advantage of a skilled work force, establish suppliers, and develop long-term partnerships in China. In order to achieve this, they are often willing to ‘transfer’ their key technology and designs to Chinese subsidiaries of European firms, joint-venture (JV) partners, or Chinese manufacturing and service companies. One of the challenges facing European companies coming to China is devising creative solutions to minimize the risk to their intellectual property (IP) associated with such technology transfers. A technology transfer happens in a number of different ways. European companies most commonly transfer their technology by licensing their patents, designs, software, trade secrets, and know-how. Ownership of the technology may be transferred, but this type of transfer is less common. A common misconception is that a technology transfer is limited to transfers of high technology. However, many European companies using contract manufacturing to manufacture low technology, consumer, or industrial products, for example based on product designs, must deal with many of the same risks to their IP as their high...
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...orientation of surfaces, etc. this a complex phenomena which is influenced by multiple factors that includes ignition, heat release rate, flame spread and the generation of different products of combustion like carbon IV oxide and carbon II oxide. The research was performed by studying various sources in the library and in the internet and also performing experiments to simulate a real life situation. Introduction The Fire Problem The flammability of a material is a complex event which is influenced by multiple factors that includes ignition, heat release rate, flame spread and the generation of different products of combustion like carbon IV oxide and carbon II oxide. In order to better protect the people and property from risk posed by the unwanted fires, it become necessary to understands all these factors under different conditions. Babrauskas and Vytenis 1992 suggested that heat release rate is the main variable in fire hazard; but Kashiwagi and Ito argued effectively that, the flame spread over the surface of combustible material such a wall and a floor is the main variable responsible for the growth of fire at the initial stages of fire. In addition, the angle of orientation of the combustible material has been found to contribute to the flame spread; specifically, upward flame spread on a vertical surface has been recognized as important since it is often present during the development of...
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...Analysis 4 1.3.1 Profitability of a transaction 4 1.3.2 Trade-in loss 5 1.3.3 UCS loses 5 1.3.4 What advice do you have for the owners regarding the new NCA structure? 6 2 Other Frameworks 6 2.1 Control 6 2.1.1 Input 6 2.1.2 Process 6 2.1.3 Output 6 2.2 Profit Plan 7 2.2.1 Profit wheel 7 2.2.2 Cash wheel 7 2.2.3 ROE wheel 7 2.3 Measuring divisional performance 7 2.4 Balanced Scorecard 8 2.5 Transfer Prices 8 2.6 Incentive system 9 2.7 Control levers to manage risk 9 2.7.1 Operations risk 9 2.7.2 Asset impairment risk 9 2.7.3 Competitive risk 9 2.7.4 Franchise risk 9 2.8 Final framework 10 3 Exhibits 10 Overview: The link between control systems and strategy The link between control systems and organizational structure (spans, cost/profit centers) The choice of what to control The profit plan Strategic profitability analysis (SPA) Designing asset allocation systems Measuring divisional performance The Balanced Scorecard (BSC) Transfer prices (TP) – calculation of prices, which method was used? Incentive systems Control levers to manage risk PM&CS as control levers The Case Content Background Company information Centralized company Franchised dealer and authorized service center for Ford, Saab and Volkswagen The dealership was situated in an upstate New York town with a population of about 20.000 The company maintains its competitiveness by providing full services to its customers. Owned as a corporation by George Liddy and Andrew...
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...1. Introduction Transfer Pricing is becoming highly important as soon as a multicorporate enterprise or business is structured across borders. Transfer Pricing deals with structuring international transfer prices within a multicorporate enterprise or business, in particular the evaluation of tangible and intangible assets be-tween business entities within the same multicorporate organisation or, more specifically, the price one segment (subunit, department, division and so on) of one organisation charges for a product or service supplied to an-other segment of the same organisation. Every multicorporate enterprise or business aims at minimising its tax obligations in order to maximise its overall profits. In principal, multicorporate businesses have to pay tax in their respective host countries, based on the share of their profit which arises in (or is allotted to) the respective business in such host country. These host countries can be different in various respects e.g. tax systems, customs duties, currency exchange rates, legislation and so forth. As a result, Transfer Pricing also affects revenue and customs authorities, investors, creditors and alike. The obligation to comply with national and international tax regulations regularly conflicts with the goal of a tax-efficient allocation of profits within a multi-national entities on the one hand and the respective tax legislation which is primarily nationally-focused on the other hand. Thus, an anticipatory business...
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...determination of price for transferring goods, services, and assets beyond the national borders of a parent company, known as transfer pricing, remains a controversial challenge. Along with increasing globalization, international transactions between related parties (between parent company and their affiliates or between affiliates) are playing an increasingly significant role in world trade and economy. As multinational enterprises are said to account for about 60% of world trade, transfer pricing has become the number one issue in the international tax arena (Ping and Silberztein 36). There are several different methods utilized to determine transfer pricing. There are strong opinions on the most accurate method to document and report transfer pricing. The most preferred is the arm’s length principle, stating, “it should reflect the prices that would have been set, had those transactions taken place among independent entities” (Houston and Gracon 12). In this paper, I will discuss the difficulty in comparable pricing, the differences of direct tax and customs rules, and firms costly transfer pricing documentation that are all controversial challenges with the arm’s length principle. The Arm’s length principle, most preferred for many years, lacks the ability for a firm to acquire accurate comparable pricing. As Gareth Green, director of Transfer Pricing Solutions in the UK says: ‘Often the only real comparisons are commercially proprietorial transactions, which competing...
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