Methods used in adjusting transfer prices
1. Comparable uncontrolled price method (CUP)
CUP method corporate the price at which a comparable and uncontrolled transaction is conducted. Comparability between these transactions i.e. (controlled and uncontrolled) exist where there are no difference between transaction or if there is when such differences do not have a material effect or for which reasonable adjustment can be made hence an arm length transfer prices can be determined through a comparison with a sales price between 2 unreleased incorporations executing a comparable transaction. However the fact that virtually any minor differences in the circumstances of trade may have a significant effect on the price make it exceedingly difficult to find a transaction that are sufficiently comparable.
2. Cost plus method (CP)
This method is generally used for the trade of finished goods, it is determined by adding': an appropriate mark up to the costs incurred by the selling party in manufacturing or purchase the goods provided with the appropriate markup been based on the profits of other companies comparable to the involved parties. Cost based approaches are however not transparent as they appear. A company can easily manipulate its cost accounts to alter the magnitude of the transfer price.
3. Re-sale price method (RP)
This is found by working backwards from transactions taking place at the next stage in the supply chain and is determined by subtracting an appropriate gross mark-up from the sales price to an unrelated third party with the appropriate gross margin been determined by examining conditions under which the goods or services are sold and comparing the) said transactions to third party transactions.
4. Profit split method (PS)
This method is applied when the business involved in the examined transactions are too integrated to allow for separate evaluation and so the ultimate profit derived from the endeavor is split based on the level of contribution. It is often determined by some measurable factors such as employees' compensation. Payment of administration expenses of each participant in the project.
Wilfykil answered the question on February 26, 2019 at 05:39
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