Responsibility Accounting II

1
Responsibility Accounting II
19

• Accountancy 503
• Fall 2006
• Professor Clifton Brown

2
Transfer Pricing
In many instances, when an organization has
multiple profit centers, some profit centers may
use the goods or services of other profit centers.
Transfer pricing is a mechanism for controlling
transactions between profit centers.
3
Optimal Transfer Price
Economists studying the issue derived an optimal
transfer pricing policy. Their conclusion
(holding all other things equal) is
Optimal Transfer Price
Sellers Opportunity Cost

4
East Division
Regal Corporation
East Division Paper mill that makes cardboard
Carlton Division Fabricator of cardboard liners
and boxes
Cardboard TP?
5
Bluespring Communications
Bluesprings operating divisions do business with
each other

• Film licenses its TV productions and movies to
  Networks
• Cable subscribes to Network channels and
  programming
• All three generate revenues by cross-promoting
  each others products.

Bluespring executives direct that the transfer
prices should be at fair market values (i.e., at
market prices). Do you agree with this transfer
pricing policy?
6
International transfer pricing
An objective of multi-national companies is to
minimize worldwide tariffs and taxes.
7
Symantec in a 1billion IRS dispute
The dispute is over the fees and cost-allocation
arrangements between Veritas and an Irish
subsidiary of Veritas.
The IRS contends that licensing fees paid by the
Irish subsidiary to Veritas in the U.S. were too
low and that Veritas credited the U.S. business
with too much of the cost of developing certain
technology.
Both had the effect of increasing the income of
Veritas's sub-sidiary in Ireland at the expense
of income in the U.S., conse-quently lowering the
U.S. tax bills paid by the company in 2000 and
2001.
8
Multi-jurisdictional transfer pricing
An objective of companies that operate in
multiple taxing and regulatory authorities is to
minimize the tax impact of such authorities.
9
Multi-jurisdictional transfer pricing
Brand Royalty
Delaware subsidiaries ?
Transfer prices ?
Subsidiaries in other states ?
10
Turn-in a case write-up
The following individuals should e-mail a
write-up of East Division to the instructor no
later than 24-hours from now
Ates, Nuri Chen, Jeffrey Choi, Hong Joo Gundogan,
Gurol Jinsirivanich, Napaporn Law, Pi-Cheng
Lee, Jun-hee Lee, Szu-Hsien Michaels,
Jonathan Parli, Benjamin Wei, Baisong Zhang, Yinan