Describe the Alternative Methods Applied in Transfer Pricing.

The alternative methods applied in transfer pricing are:

Transfer at Cost Method: The first alternative methods is to exchange goods and services at cost. This method is based on the assumption that lower costs lead to better performance by the affiliate. This keeps duties at the receiving end to the minimum. Manufacturing unit does not make any profit on the transfer sale. However, the receiving unit is expected to make profit, because its cost is minimum. This policy is rarely used now a days.

Transfer at Cost Plus Method: Cost plus method attempts to add some amount or percentage to the cost of the product. This method recognizes the principle that profit must be shown for every product or service at every stage of movement. This method is acceptable to both transferor and transferee-divisions.

Transfer at Market Price Method: Under this method, transfer is made on foreign market price. It may, therefore, be too low for the selling subsidiary and the production cost may not be covered. This method enables a company to establish its name or franchise in the new market without undertaking production there.

Transfer at Arm’s Length Price: The other extreme in transfer pricing is to charge the international division the same price any buyer outside the firm pays. This price favors the producing division because it does as well on internal as on external sales. Arm’s length price method uses the same prices as quoted to independent customers. This method creates problem when the product has no external buyers or is sold at different prices in different markets.