University Business Valuation and Analysis Report on Transfer Pricing

This report, titled "Business Valuation and Analysis," examines the controversial practice of transfer pricing, focusing on its darker aspects as highlighted by Sikka & Willmott (2010). It delves into how companies utilize transfer pricing to potentially avoid taxation, affecting international trade and revenue generation, particularly in countries like China and Russia. The report analyzes the impact of transfer pricing on cost allocation, tax havens, and the overall economic landscape, including how it affects both developed and developing nations. It contrasts the conventional methods of management accounting, which emphasize decision-making and cost management, with contemporary methods that prioritize performance evaluation and management using modern tools. The conclusion emphasizes the need for governments to improve tracking of company performance in international trade and highlights the importance of synchronizing conventional and contemporary methods to curb tax evasion and promote fair international trade practices. The report also references various academic sources to support its analysis.

2017
Business
Valutaion and
Analysis

1
By student name
Professor
University
Date: Januray 23 , 2018.
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Contents
Introduction…………………………………………………………………....3
Question 1…………………………………………………………………......3
Question 2…………………………………………………………………......4
Conclusion………………………………………………………………….......5
References.....…………………………………………………………….........7
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Introduction
Transfer pricing is a concept that is very much existent in this modern world. It refers to the
total value that is attached to the prices of goods and services between related parties. It is the total
price that is charged in a transaction. It has many positive aspects as it helps the companies in avoiding
double taxation and relieves them of the unnecessary tax burden. But in the process of doing so, it has
often led to the unlawful use of the law, by companies to curb the genuine payment of taxes, that they
were to pay. In this modern era and globalized situation, this concept of transfer pricing holds utmost
importance given that the companies indulge in cross trading and consumers are attracted towards
policies that help them in payment of fewer taxes. In this assignment, the dark side of transfer pricing
will be discussed as stated by the authors (Sikka & Willmott, 2010). It emphasizes the importance of cost
allocation between the nations and how cross-country trade is being affected by the modern means of
tax cutting that is covered under the veil of lawful tax avoidance. This forms the core of this article and
throws lights on the different aspects of transfer pricing that includes the darker side which is not very
popular in terms of disclosure.
Analysis
1.The core argument of this article that the authors want to present is that the concept of
transfer pricing is always taken in good light, considering that it makes it easier for the companies to
indulge in cross country trade and avoids the pressure of double taxation, but there is a darker side to
the same. This is very apparent from the way companies are making use of the law to avoid taxation and
the pressure is then given on the consumers indirectly, who end up paying more prices for goods
because of the complex taxation policy (Burke & Clark, 2016). This article highlights certain incidences
where it can be clearly seen how companies are making use of this policy to avoid paying taxes. For
examples, countries like China and Russia, that enjoys huge international trade owing to their great
products at cheaper prices, make use of this transfer pricing policy to sell products to the international
trader at lower prices, that causes these countries huge loss of revenues in the form of taxes. As per
reports the Chinese exports are underpriced and the imports are overpriced, this is causing huge loss of
revenue. Even in Russia, where there is no strict guidance and rules and in absence of direct foreign
investments, the government must resort to other methods like subsidies and no taxation zone, to
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promote trade and to recover from the losses that occur because of the taxation policy that governs
international trade. Not just developing countries, even developed nations are getting affected because
of these policies, countries like the USA are also losing on revenue (Crosby & Henneberry, 2016).
Transfer pricing not only refers to the transaction of goods and services but also refers to the transfer of
wealth that occurs between nations when they indulge in international trade. The aim of every nation is
to improve its economic condition by developing its GDP and for the same they try to indulge in such
activities as activities as per which they end up paying less or no amount of taxes. But this in turns
affects the profitability of other countries, as they lose on taxes, that it there primary source of revenue
(Dichev, 2017). On the forefront, it may look that the transfer pricing policy is helping the countries in
avoiding double taxation, but it is also helping the companies in tax avoidance as they transfer all their
transactions to such area in which they do not have to pay any taxes. Tax havens are an aspect of
transfer pricing schemes, where certain areas are such that where the companies do not need to pay
any taxes if they have transactions in that zones. Many companies try to make use of the same and try
not to pay taxes (Han, Subrahmanyam, & Zhou, 2017). The prevalence of such schemes is very difficult
to be judged as they are very carefully and tactfully hidden and accessed only when there are some
major fallouts, or whistleblowing. It also leads to compliance issues in many multinational corporations,
and the same effects the overall operations of the companies. It also affects the cross-country trading
and international mergers that occurs with a viewpoint to provide better services and resources to the
public. Thus, we see that not just in promoting international trade, the concept of transfer pricing also
plays an important role in promoting the incidences of tax avoidances. Many companies try to avail the
same, make misappropriate use of it and this leads to loss of revenue. Because of the same many
countries do not encourage international trade, and the end users are the most affected party in the
whole scene (Sikka & Willmott, 2010).
2.This article, in general, reflects the conventional techniques of management accounting, that
cover different methods like decision making, future-focused, timeliness. In this article, the authors have
provided a brief view on how the various aspects of transfer pricing are affecting the overall cost and
revenues that the companies are earning owing to the aspects of the tax havens that are prevalent in
case of transfer pricing concepts (Fay & Negangard, 2017). Transfer pricing is a method that helps in
determining the overall cost that the countries pay in case of international and cross-border transaction
lieu of the goods and services that they exchange. This helps in generating more revenue, thus helps in
effective cost management which is an important aspect of the conventional management accounting.
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This article also reflects how companies are taking decisions on having transactions and shifting all their
operations to tax-free zone, so they end up paying less amount of taxes (Abbott & Kantor, 2017). This is
an aspect of decision making that reflects the conventional method of management accounting. This
article also focuses on the future focused aspect of the transfer pricing policies, where companies tend
to go for such deals, in which they will have to pay no taxes in times to come. And, the future aspect is
there in the fact that so many companies have to lose on their profits and have to lower their rates, and
the government is also losing so many amounts of income owing to these transfer pricing policies and
how the same will affect the times to come (Alexander, 2016).
This is different from what is provided in the textbook because in the textbook the focus is more
on the contemporary aspects of management accounting which focuses on performance evaluation and
management. Performance management covers the aspect of modern management method, that
includes, communication of business strategy, tracking the performance, evaluating the rewards and
recognition and the overall guide for the future development of the company. The measures are very
simple and are mostly controlled with the help of system software and tools. This is an important aspect
of the contemporary method of management accounting that includes, use of balanced scorecards, use
of performance trackers, inventory regulators (Chiapello, 2017). It makes the work easy and more
accurate and there is less human intervention in this. This is how the contemporary method of
management functions. But the same is not applied in this article of transfer pricing and focuses mainly
on the conventional method of accounting. There is no use of modern methods of performance trackers
that can help in regulating the overall work done by the companies in dealing with tax avoidance and
reduction of the overall revenues for the countries (Prasad & Chand, 2017).
The major characteristics of effective performance measurement control include emphasizing
the overall positives, it must be reported in a timely manner, there must be proper benchmarking and it
must be limited to the performance measure. All this is not present in this article on transfer pricing that
reflects the dark scenario of the countries and the international trade under the realms of transfer
pricing and its policies (Maynard, 2017). This is how this system works and same has been explained in
this article, covering the different aspects on how the countries are suffering owing to the decision-
making capabilities of the nations on declaring regions as tax haven and no proper scrutiny being done
later to find how the companies are taking undue advantage of the same (Guragai, Hunt, Neri, & Taylor,
2017). The bigger picture appears all rosy, but the darker side is still prevalent which is not there in open
and requires a lot scrutiny to be assessed. This is how the conventional and the contemporary methods
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of management accounting are different from each other in terms of the overall performance
management and the same is reflected in the article stated above.
Conclusion
Based on the above analysis it can be said that there must be a more simplified way by which
governments can track the overall performance of these companies that are indulging in international
trade and the overall effect that it is having on the revenue of the countries in question. The outer
picture might appear rosy but there is a dark side to it and it is the need of the hour that same must be
brought out in open and the end user should not be affected because of the same. The conventional and
the contemporary methods of performance management must go hand in hand and should reflect the
true position by using the modern tools in synchronization with the techniques of the contemporary
method of management accounting (Chariri, 2017). In this way, the companies will not be able to take
undue advantage of the laws and by-laws on transfer pricing and correct revenue will be reflected. This
is the long run will help in promoting international trade and help in curbing tax evasion. Strict
punishments must be there for companies that are found defaulting in this zone and a proper
performance tracker must be developed to look at the companies that function in this respect. This is
how the concept of performance management can be synced with this aspect of transfer pricing
(Sweeting, 2017). Experts must be appointed to look over the minute details under the broad picture of
transfer pricing and how changes can be initiated that will discourage the companies from indulging in
any form of tax avoidance.
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References
Abbott, M., & Kantor, A. (2017). Fair Value Measurement and Mandated Accounting Changes: The Case
of the Victorian Rail Track Corporation. Australian accounting Review.
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Burke, J., & Clark, C. (2016). The business case for integrated reporting: Insights from leading
practitioners, regulators, and academics. Business Horizons, 59(3), 273-283.
Chariri, A. (2017). FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING
WITHIN INSTITUTIONAL FRAMEWORK. Journal of Economics, Business and Accountancy, 14(1).
Chiapello, E. (2017). Critical accounting research and neoliberalism. Critical Perspectives on Accounting,
43, 47-64.
Crosby, N., & Henneberry, J. (2016). Financialisation, the valuation of investment property and the urban
built environment in the UK. Urban Studies, 53(7).
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), 617-632.
Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, 38, 37-49.
Guragai, B., Hunt, N., Neri, M., & Taylor, E. (2017). Accounting Information Systems and Ethics Research:
Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017, 31(2), 65-81.
Han, B., Subrahmanyam, A., & Zhou, Y. (2017). The term structure of credit spreads, firm fundamentals,
and expected stock returns. Journal of Financial Economics, 24(1), 147-171.
Maynard, J. (2017). Financial accounting reporting and analysis (second ed.). United Kingdom: Oxford
University Press.
Prasad, P., & Chand, P. (2017). The Changing Face of the Auditor's Report: Implications for Suppliers and
Users of Financial Statements. Australian Accounting Review.
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Sikka, P., & Willmott, H. (2010). The dark side of transfer pricing: Its role in tax avoidance and wealth.
Critical Perspectives on Accounting, 342-356.
Sweeting, P. (2017). Financial Enterprise Risk Management (Second ed.). UK: Cambridge University
Press.
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