International business is composed of various commercial transactions taking place between two or more regions, countries and nations. It involves such transactions between two or more political boundaries. Private entities involve in international business solely for profits while governments engage themselves in international business for political and financial reasons. This essay reflects transfer pricing in relation to international business with the aim of understanding the various challenges faced by the management while setting transfer price policy and the ways managers can avoid such bottlenecks (Lorraine para 3).
Why transfer pricing is complicated for companies such as Swatch
Transfer price is the price associated with transactions involving firms that are related. Transfer price is normally encountered in multinational organizations that have subsidiaries in different parts of the globe. The transfer price can be set based on production cost or the market cost of the associated product. However, it is noted that in multinational companies such as Swatch the process of formulating transfer policy is normally complicated (Galuszka 2). This is caused by various reasons. The main reason as to why multinational companies encounter such complications is the fact that while setting the transfer pricing policy organizations normally want to achieve various objectives (Galuszka 2). These objectives are usually conflicting. The objectives of the policy adopted in pricing are mainly influenced by factors that can be broadly categorized into two groups: factors that may result in overpricing and the ones that are likely to result in underpricing. Overpricing is done by cmpanies mainly to gain a buffer against authority regulation, avoiding charges associated with damping, and ensuring the parent company getting profits. The company transfer pricing policy is motivated by underpricing when the company aims at reducing taxes when the subsidiary company is located in a country where the tax rates are higher than those in the country of the parent company. This is the approach that is taken by the Swatch firm following the whistle blowers. Another reason for underpricing is market penetration strategies and reducing the customs tariffs.
Setting these transfer policies is sometimes complicated by the fact that different nations have different legislation affecting companies’ operating in the nation. Due to this, a company is normally forced to consider various things such as tariffs, trade duties, and taxations while developing the policies. This makes the process complicated since the various factors affecting the production of goods and services from different nations have to be taken into account.
Measures that can be taken by Swatch to avoid complications with transfer price policy
One of the approaches that can be used in avoiding the complications encountered is to adopt a method that combines reporting with formulary apportionment as well as unitary taxation. This approach is evident to be effective in minimizing dubious play in the process of taxation. However, while implementing the unitary taxation systems the organization should be aware of the following challenges:
1) path dependency: this is where resistance will be faced since most people are resistant tto change;
2) vested interest: this mostly happens since most multinational organizations are always aiming at manipulation with transfer pricing to their own advantage, hence the new approach will not be favorable to them thus resulting in resistance;
3) technical issues: this specifically concerns setting the system using the unitary approach; the system will consume most of the profits of the organization, and it might delay the activities of the organization as well (Aswathappa 514).
Furthermore, a multination organization can avoid the predicament, such as the one being faced by the Swatch organization, by involving the tax department in the formulation of the policy regarding transfer pricing. Importantly good collaboration between the units involved with finance is essential for ensuring such predicaments are done away with. However, implementing this approach will be interfered by the fact that coordinating all the departments dealing with finance in the parent company as well as the subsidiary companies might be hard (Cherunilam 583).
From the essay, it is evident that international business refers to a form of business taking place between one or more boundaries. Transfer pricing is one of the aspects associated with international business especially when two companies that are related are doing business together. It is clear that setting up transfer policy is complicated due to various factors associated with the business profit making. The essay also offers some viable solutions that can be used in navigating through the complications associated with the creation of transfer policy in an organization.