The company performs transfer pricing by evaluating and measuring the financial kinerof a company or by minimizing the company’s tax burden.  An example of transfer pricing in a company is as follows:  PT Mei Bong domiciled  in Australia has a subsidiary in Indonesia, namely PT Mei Jaya, which is engaged in the toy industry. To produce toys sold in Indonesia, PT  Mei Jaya imports raw materials from Mei Lim Corp. The  fair price of these raw materials in the market, for example,  is US $ 10 / pcs. However, in the transaction between  Mei Lim Corp and PT Mei Jaya, the same raw material price was sold at US$30/pcs. So there is a mark up of US$20/pcs. This US$10/pcs price will not be possible if the transaction is carried out with a company that is not in a group or does not have a special relationship. So that there is no fair market price principle in this transaction (arm’s length price principle).  According to Horngen (2015:868) argues  that transfer pricing  is the price of a subunit (department or division) for a product or service that is transferred to another subunit in one organization. According to Setiawan (2014:2), revealing that what is meant by transfer pricing  is a company policy in determining the transfer price of a transaction, both goods, services, intangible assets, or financial transactions carried out by the company.

It can be concluded that, Transfer Pricing is an effort made  by multinational companies to determine the transfer price for goods or services transactions made in connection with taxes or can be referred to as an effort to minimize the company’s tax burden.  According to Choi, et al. (2020),  transfer pricing is the company’s decision to determine the transfer price of goods, services, and transactions applied by the company. According to Hilton & Eccles (1987), transfer pricing is the price of a product from a certain division given to another division.

According to Tippett & Wright (2006), transfer pricing is a selling price that has been determined in the exchange between divisions to record sales income and costs from the division. Pricing transfer  is the determination of transaction prices determined by parties who have a special relationship as management control over transactions of goods and services between members. Usually,  the act of allocating profits from corporate entities in one country to corporate entities in another country in a  group of companies is also carried out with the aim of minimizing instead of evading taxes  (Suandy, 2006) in (Panjalusman et al., 2018).

References:

  • Dual. N., Mayowan, Y., & Karjo, S. (2016). The Effect of Taxes, Tunneling Incentives, and Good Corporae Governance (GCG) on Indications of Transfer Pricing in Manufacturing Companies Listed on the Indonesia Stock Exchange (Study on the Indonesia Stock Exchange Relating to Foreign Companies). Journal of Taxation, Vol. 8, No. 1, pp 1-9.
  • Marfuah. & Azizah, A. P. N. (2014). Effect of Taxes, Tunneling Incentives and Exchange Rates on Company Transfer Pricing Decisions. JAAI, Vol. 18, No. 2, pp 156-165. Mispiyanti. (2015). Effect of Taxes, Tunneling Incentives, and Bonus Mechanisms on Transfer Pricing Decisions. Journal of Accounting & Investment, Vol. 16, No. 1, pp 62-73.
  • Nugraha, A. K. (2016). Analysis of the Effect of Tax Burden, Tunneling Incentive, and Bonus Mechanism on Transfer Pricing of Multinational Companies Listed on the Indonesia Stock Exchange. (Thesis, Semarang State University). Obtained from http://lib.unnes.ac.id/25212/1/7211411003.pdf
  • Pramana, A. H. (2014). Effect of Taxes, Bonus Plans, Tunneling Incentives, and Debt Covenants on Transfer Pricing Decisions. (Thesis, Diponegoro University Semarang). Obtained from http://eprints.undip.ac.id/45246/

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