The Research Of Transfer Pricing Model And Its Use (on Effectively Competitive Market)

Transfer pricing is a pricing system used in the internal trade between group companies, which can be found in the transactions between parent company and subsidiary, also, between subsidiaries. It works as the lubricant of inter-group business, effectively reducing or even eliminating the negative impacts from corporate integration, such as tax, unstable interest rate, foreign exchange restriction, price restriction and political risks. It also has the financial function to mange cash flow and to adjust the profits for subsidiaries. Nowadays, vertical integration is more and more popular in group companies. At the same time, the subsidiary is not only one part of the group, but also an independent player on its own market. As the integration makes group pays more attention to the consolidated revenue and profit, transfer pricing is more like a tool to avoid negative impacts from tax and other government restrictions, which jeopardized the subsidiaries’operating initiative for profit. This paper studies the pricing model of intermediate product when the market is effectively competitive based on the current dilemma mentioned before. The model introduces Factor Matrix to solve the problem of evaluating a lot of non-financial factors in inter-group business. By analyzing group profit though different angles of P&L, cash flow and non-financial factors, this model provides a new practical method of pricing for intermediate product on an effectively competitive market. Based on the model, a company can also find new thoughts for transfer pricing considering the unknown impact as foreign exchange restriction and political risks.With strengthen of vertical integration, the subsidiary as one step of the group operation chain has to fulfill the profit target of its own and solid the group competitive advantage. How to price the inter-group business on an effectively competitive market for intermediate product to promote the subsidiaries’performance will be one of the most important problems in group finance strategy.