Identify and explain the principal techniques of transfer pricing, and Essay

Identify and explain the principal techniques of transfer pricing, and comment on likely developments in transfer pricing in an era of globalization - Essay Example In contrast, a market price is not determined by an individual but prevails to any participant within a market set-up involving exchange of goods and services between unrelated persons. We note that the market price cannot be tampered with and every person strives to maximize on own gains. Prices within the conventional market scene are determined by forces of market while the transfer prices are determined and set by an individual and thus are not negotiated freely or openly. This implies that transfer prices would often deviate from the conventional market prices within the same or alike market circumstances. It is worth to note that subsidiaries to one enterprise operating within one country face similar operational environment and hence the transfer prices poses similar problems of tax avoidance while compared to subsidiaries operating within different countries. With multinationals running various subsidiaries in different countries, which have different regulatory frameworks, t axation problems through transfer prices are very pronounced. The most prevalent problem with price transfers with multinationals is the tendency of subsidiaries stating inaccurate prices in order to lower profit margins to avoid high taxation. Beside, multinationals manipulate transfer prices through the internal payment networks with the goods they share between one to another. Therefore, the channels adopted within trading transactions by multinational subsidiaries, some price distortions are possible which may not be possible within the uncontrolled trading transactions by unrelated/unaffiliated trading companies. There are a number of principles techniques, which are applied in transfer pricing and which determine the overall outcome in price transfers. The methods of transfer pricing involve ways of calculation of margins of profits of business transactions within an entire business enterprise. However, it is worth