and to develop a substantiated conclusion.
At this stage, it is desirable to study the structure of the company, make a full list of related individuals, describe the company’s activities, make a competitive analysis, describe the market for goods, works and services on certain reviews of transactions that are controlled, and describe approaches to pricing by specifying the method of pricing, costs included in the price, etc.
At the second stage, a functional analysis is carried out. Based on it, in the future methods for determining transfer prices can be reasonably chosen.
In this case, the functions fulfilled by the parties involved in a controlled transaction are analyzed. For this analysis, technological maps, as well as other information sources are used.
The next step is to test prices. At the same time, the following should be implemented as a minimum:
— Price analysis in accordance with internal operations,
— Provision of inquiries to organizations that control prices, and the selection of appropriate information,
— Price research in international databases, and
— Testing according to five methods of TP.
It is necessary to study the possibilities of applying all five methods for calculating transfer prices, as well as to describe and substantiate the reasonability of using each of the methods for the relevant controlled transaction, the reasons and conditions for choosing or abandoning a particular method.
In its turn, the TP method is selected taking into account the analysis of a particular situation. It implies a review of the possibilities of applying well-known TP methods including:
1. Traditional operating methods:
Comparative uncontrolled price method,
Resale price method, and
“Cost plus” method.
2. In this case the methods of profit from operations (net margin, profitability) take into account the following:
Standards of comparison that must be applied to the method of net profit from transactions,
Selection of net profit indicator,
Determination of net profit and its weighing. It is taken into account that net profit can be correlated with sales, expenses, assets and other bases, and
Defining the profitability.
3. The methods of distributing profits from operations that require to select various approaches to the profits distribution (analysis of contributions, final analysis) and to determine the total income to be distributed — actually on the calculation basis.
Finally, it is necessary to make a reasonable conclusion about the methods that should actually be applied in a particular case.
In addition to defining the method of TP, it is also important to make an economic and comparative analysis. The task is to find potentially comparable companies. The company should be able to give a detailed description of the actions taken to select such companies, sources of data, and criteria for the selection.
It is necessary to note that this stage is rather difficult, because it is usually not easy to obtain valid data for the benchmarking study. In addition, it is necessary to describe the criteria for determining the comparability of operations.
It is reasonable to carry out the benchmarking study of comparable companies according to a specific pattern by disclosing the company name, its status, date of foundation, a concise description of the activity, functional profile, and analysis of sales revenue.
In the framework of the financial analysis, the profitability indicators are assessed, and the weighted average profitability indicator for each company over a three-year period is calculated.
In conclusion, prices on a controlled transaction are compared with the market prices according to the “arm’s length” rule. Based on this comparison, it is possible to make a conclusion about the need to make adjustments to the income tax.
In order to properly prepare documents on TP, it is very important to have certain prerequisites. According to the authors, they are the following:
1) It is necessary to have deep knowledge of technological processes of the enterprise and to document them in product sheets.
2) It is necessary to rationally organize management accounting in general, and expenses and cost accounting in particular, as well as to obligatorily approve a detailed list of cost items in the annex to the order on the accounting policy of the enterprise.
3) Precise control over the formation of the contractual base of the company with its business partners and the fulfillment of contracts.
4) Permanent monitoring of all controlled transactions and operative accumulation of the information that that can be required to analyze them for the purposes of TP.
IV. CONCLUSION
According to the results of the study, it is possible to make the following conclusions.
The transfer price enables managers of responsibility centers to make optimal management decisions, increases their interest in improving business efficiency. That is why efficient administering of TP is of particular importance for top managers. TP creates opportunities for operational control of costs and results of the activity at different levels of the enterprise.
Based on analyzing the aspects of TP informational provision, it has been determined that the best approach to improving it is to create a system of permanent document flow, accumulation, use and archiving data to substantiate the transfer prices used to monitor controlled transactions and to subsequently make reports.
The company must establish a unified document flow system, as well as management and financial accounting system that would provide the management with the information on all transactions with affiliated persons under control. The creation of such system and its work in a constant mode can considerably reduce risks for companies, taking into account the constant expansion of business partnership of enterprises.
REFERENCES
1. T. Lohse, N. Riedel, and C. Spengel, “The Increasing Importance of Transfer Pricing Regulations — a Worldwide Overview”. Oxford, 2015.
2. O. Amerighi, “Transfer pricing and enforcement policy in oligopolistic markets. Foreign Direct Investment and the Multinational Enterprise”. Cambridge: MIT Press, 2008, pp. 117–154.
3. D.L. Swenson, Tax reforms and evidence of transfer pricing”. National Tax Journal, vol. 54(1), 2001, pp. 7–25.
4. A.N. Zelenyuk, “Sushchnost i osobennosti transfertnogo tsenoobrazovaniya” [“The essence and features of transfer pricing”]. Russian Foreign Economic Bulletin, vol. 7. 2013, pp. 49–61.
5. A.S. Kizimov, and N.A. Kuzmina, “Ob alternativnyh metodakh transfertnogo tsenoobrazovaniya [“On alternative methods of transfer pricing”]. Tax Policy and Practice, vol. 11, 2012, pp. 78–80.
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