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Home/ Questions/Q 120
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Pooja Sharma
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Pooja Sharma
Asked: July 16, 20192019-07-16T23:22:02+05:30 2019-07-16T23:22:02+05:30In: Commerce

What is transfer pricing? Why do the Transnational Corporations resort to transfer pricing?

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What is transfer pricing? Why do the Transnational Corporations resort to transfer pricing?
International Business Finance
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    2019-07-16T23:32:20+05:30Added an answer on July 16, 2019 at 11:32 pm

    It is corporate function, transfer pricing, that is potentially relevant to each of these activities. It is a technique to transfer the funds from one location to another. Whenever a payment crosses borders in a treasury context whether to provide a loan, purchase a receivable, provide a guarantee, sweep cash, factor a receivable, provide a hedge or insurance product a transfer pricing issue is present.

    Transfer pricing is often viewed as a taxation issue and thus the responsibility of the corporate tax department. This include challenges that view, and makes the case that an integrated, multi-functional approach to MNE treasury planning in the context of transfer pricing can be an important component in improving the efficiency of cross-border financial management. It also states conceptual and empirical information as well as numerical examples to illustrate relevant tax and transfer pricing concepts for policy planners and others responsible for MNE treasury and tax planning.

    Inter company financing transactions are becoming increasingly important to Multinational Enterprises (MNEs) as they expand internationally. Corporate treasurers of MNEs have many responsibilities, including the management of international capital structure and cost of capital, the financing of cross-border acquisitions, foreign direct investment, international capital budgeting and cash management, management of foreign exchange and transactional risk, and port folio and investment management. .

    Funds Transfer Pricing is an analysis tool that can be used to help a bank measure its profitability in a variety of different ways. It allows management to compare the profitability of different product lines within the company and it can be drilled down even further to allow comparison between individual employees. It is also very useful for comparison between branches. This study will discuss the fundamentals of Fund Transfer Pricing (FTP) and talk about how Funds Transfer Pricing will affect the profitability of two branches of a bank.

    Also focuses on a corporate function, transfer pricing that is potentially relevant to each of these activities. Whenever a payment crosses borders in a treasury context whether to provide a loan, purchase a receivable, provide a guarantee, sweep cash, factor a receivable, provide a hedge or insurance product a transfer pricing issue is present. Transfer pricing is often viewed as a taxation issue and thus, the responsibility of the corporate tax department. Banking businesses face a problem of accurately estimating the profits earned from their various fund raising and deployment activities.

    The mismatch between the source of the funds and the deployment raises issues of interest rate risk that cloud accurate profitability measurement. This involves the costs of managing the interest rate risk as a bank-wide activity, and delineating the benefits and costs of this activity is important for accurate performance measurement. The funds transfer pricing module is designed to help both manage risk effectively and to accurately measure performance in various divisions of the bank.

    The funds transfer pricing engine’s output drives both the interest rate risk management within the bank as well as the measurement of profits clearly differentiating the rewards and responsibility of different units. It can be explained by this example as well. Reveleus Customer Profitability and Reveleus Product Profitability take in data from the Transfer Pricing module for accurate and consistent Net Interest Income definition as well as other costs data to provide a complete performance measurement solution for your bank. Reveleus’ funds transfer pricing also integrates with the Risk suite of products that handle the risk arising out of interest rate changes in the marketplace. Reveleus Funds Transfer Pricing also uses the same cash flow engine as well as assumptions about the behavioral characteristics used in the management of the interest rate risk of the bank.

    In simple terms, transfer pricing is “A transfer price measures the value of products furnished by a profit centre to other responsibility centre within a company. Internal exchanges that are measured by transfer prices result in (i) revenue for the responsibility centre furnishing (i.e. selling) the product and (ii) costs for the responsibility centre receiving (i.e. buying) the product.” (Anthony, 2004). In the banking industry, this would be deposits that are collected by one branch and used by another to fund loans.

    When a bank makes a loan to a customer, the funding for this loan has to come from one source or another. Typically, the funding in a financial institution will come from deposits collected by the bank. This type of funding is normally the cheapest and most desirable; however, when deposits are not sufficient to fund all the needs for cash that the bank has, the bank will have to get additional funding in the wholesale market.

    Therefore, each deposit brought in to the bank has a value to the financial institution for funding purposes, and, by the same token, a loan also has an underlying cost of funds and is not just interest income for the bank, as it would look in a typical income statement analysis. The purpose of FTP is to place a value on each deposit and assign a cost to each loan that a bank has.

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