Management Accounting for Subsidiary of Pepsi- MyAssignmenthelp.com

Question: Discuss about theManagement Accounting for Subsidiary of Pepsi. Answer: Transfer pricing takes place when two companies of the same multinational group make a business deal for example an Australian based subsidiary of Pepsi buys something from a French based subsidiary of Pepsi. When these two companies establish particular price for the transaction, this is known as transfer pricing. Transfer pricing is neither illegal nor abusive, but what is illegal is mispricing or manipulation of price which is abusive transfer pricing.(Tax Justice, 2017). Transfer prices are inevitably needed when a business is divided into more than one department or divisions. Basically, services or products flow between the divisions and each report their performances separately. The accounting system records products or services leaving one division and entering another and some monetary value is added to record this. This monetary value is known as transfer price. In a Multinational company, transfer pricing is concentrated to fulfill only one single objective and that is minimize income taxation. The tax differences in different countries provide the multinational companies an opportunity to minimize tax payments. The company gets economic benefit by using transfer pricing where they shift profit from a country that has an unfavorable tax structure to the one which has a favorable and economically profitable tax structure. Although, there are many ways in which companies can shift profits to low tax countries but the most commonly used mode is internal or transfer price. The company achieves this by having an affiliate in low-tax location that charges high transfer prices for the products or services it sells to an affiliate in high-tax jurisdiction. Basically, it is inflating revenues where taxes are comparatively very low and costs where taxes are substantially very high. Transfer pricing is used as a potent weapon to evade income taxes. By using transfer pricing, the company minimizes its income taxes and correspondingly increases its total after tax profit. The other benefits of transfer price especially to Australia cannot be ignored. Australian economy is open with a floating exchange rate and this corporate tax deduction attracted foreign investments(Davies, Martin, Parenti, Toubal, 2015). Although, many tax departments across the globe consider this as an opportunistic behavior, but many tax authorities cry foul. Transfer pricing is the most important issue bothering the international tax departments. Thus, in order to increase the likelihood of companys paying their fair share of taxes in countries from where they operate the tax authorities have developed guidelines arms- length price transaction which are laid down by organization of economic Co-operation and Development (OECD). In order to deal with transfer mispricing, Australian government is trying to deal it with arms length principle. The United Tax Committee and OECD have endorsed this principle and is being widely between governments as basis for bilateral treaties. Exposure draft (ED) law was released in 2012 to replace Australias transfer pricing rules. With these broad powers were given to Australian taxation office (ATO) that can levy penalty of at least 25% if the arms length conditions are not consistent and documentation does not meet the minimum requirements. The Public Officer has to ensure that all requirements are met and all conditions met before signing the income tax return. Although, there are challenges, but this new draft is designed to provide ATO sufficient powers to address transfer pricing issues(Ernst Young, 2012). References Davies, R., Martin, J., Parenti, M., Toubal, F. (2015, January 5). Knocking on tax havens door: Multinational firms and transfer pricing. Retrieved may 11, 2017, from Voxeu.org: https://voxeu.org/article/multinational-firms-and-transfer-pricing-new-evidence Ernst Young. (2012). Tax Alert -Major changes to Australian Transfer Pricing rules. Ernst Young. Tax Justice. (2017). Transfer Pricing. Retrieved may 11, 2017, from https://www.taxjustice.net/topics/corporate-tax/transfer-pricing/