1. TRANSFER PRICING Vetoquinol SA TRANSFER PRICING Vetoquinol SA Experiential Case PREPARED BY: Group 2

2. Charles.passantino@mavs.uta.edu 2

3. Agenda: Agenda:  Company Profile  Definition and Overview  Transfer pricing purposes  Transfer pricing – Accounting  Transfer price -Methods Of Transfer Pricing  Influence of transfer price  Disadvantages of transfer pricing application  Challenges  Conclusion  Company Profile  Definition and Overview  Transfer pricing purposes  Transfer pricing – Accounting  Transfer price -Methods Of Transfer Pricing  Influence of transfer price  Disadvantages of transfer pricing application  Challenges  Conclusion

4. Vétoquinol in brief  Founded in 1933  Independent, family-owned company, listed on the Paris stock exchange  100% dedicated to animal health today  10th largest veterinary pharmaceutical company worldwide  4 th independent veterinary pharma worldwide  $813 M sales in 2013

5. International Presence 5 Affiliates in 24 countries // More than 450 veterinary reps // 140 distributors in 80 countries // 6 production sites // Over 1,750 employees

6. Definition and Overview  Transfer pricing is the price at which divisions of a company transact with each other.  When business units or divisions within the organization buy goods and services from one another, the value or amount recorded in a firm’s accounting records as revenue to the selling unit and cost to the buying unit.  In principle a transfer price should match either what the seller would charge an independent, arm's length customer, or what the buyer would pay an independent, arm's length supplier. While unrealistic transfer prices do not affect the overall enterprise directly, they become a concern when they are misused to lower profits in a division of an enterprise that is located in a country that levies high taxes and raise profits in a country that is a tax haven that levies no or low taxes.  Transfer pricing is the price at which divisions of a company transact with each other.  When business units or divisions within the organization buy goods and services from one another, the value or amount recorded in a firm’s accounting records as revenue to the selling unit and cost to the buying unit.  In principle a transfer price should match either what the seller would charge an independent, arm's length customer, or what the buyer would pay an independent, arm's length supplier. While unrealistic transfer prices do not affect the overall enterprise directly, they become a concern when they are misused to lower profits in a division of an enterprise that is located in a country that levies high taxes and raise profits in a country that is a tax haven that levies no or low taxes.

7. Transfer Pricing Purpose  Evaluating financial performance of different business units (profit centers) of a conglomerate  Shift earnings from a high tax jurisdiction to a low-tax one  Enables multinational corporation's to attribute net profit (or loss) before tax among the countries where it does business  Uses of Transfer pricing: a.)Reduces taxes paid b.)Reduces tariffs c.)Avoids exchange controls  Evaluating financial performance of different business units (profit centers) of a conglomerate  Shift earnings from a high tax jurisdiction to a low-tax one  Enables multinational corporation's to attribute net profit (or loss) before tax among the countries where it does business  Uses of Transfer pricing: a.)Reduces taxes paid b.)Reduces tariffs c.)Avoids exchange controls

8. Transfer Pricing- Accounting If intra-company transactions are accounted for at prices in excess of cost, appropriate elimination entries should be made for external reporting purposes. Examples of items to be eliminated for consolidated financial statements include:  Intracompany receivables and payables.  Intracompany sales and costs of goods sold.  Intracompany profits in inventories If intra-company transactions are accounted for at prices in excess of cost, appropriate elimination entries should be made for external reporting purposes. Examples of items to be eliminated for consolidated financial statements include:  Intracompany receivables and payables.  Intracompany sales and costs of goods sold.  Intracompany profits in inventories

9. Methods Of Transfer Pricing  1. Market ‑ based Transfer Pricing transfer price is determined by the market, based on the trading of the same product or service in normal conditions. 2. Negotiated Transfer Pricing This method is based on an agreement between two division managers, who determine an acceptable price to sell / buy products that circulate among them. Main restrictions of this method are:  Negotiated price may not be optimal transfer price.  Conflicts may arise between the divisions.  Spent a lot of time for negotiations.  3. Cost ‑ based Transfer Pricing In the absence of an established market price many companies base the TP on the production cost of the supplying division.  Full (absorption) cost; either standard or actual. Popular because of its simplicity and clarity.  VTQ: Cost ‑ plus For transfers at full cost the buying division takes all the gains from trade while the supplying division receives none. To overcome this problem the supplying division is frequently allowed to add a mark ‑ up in order to make a "reasonable" profit. The transfer price may then be viewed as an approximate market price.  1. Market ‑ based Transfer Pricing transfer price is determined by the market, based on the trading of the same product or service in normal conditions. 2. Negotiated Transfer Pricing This method is based on an agreement between two division managers, who determine an acceptable price to sell / buy products that circulate among them. Main restrictions of this method are:  Negotiated price may not be optimal transfer price.  Conflicts may arise between the divisions.  Spent a lot of time for negotiations.  3. Cost ‑ based Transfer Pricing In the absence of an established market price many companies base the TP on the production cost of the supplying division.  Full (absorption) cost; either standard or actual. Popular because of its simplicity and clarity.  VTQ: Cost ‑ plus For transfers at full cost the buying division takes all the gains from trade while the supplying division receives none. To overcome this problem the supplying division is frequently allowed to add a mark ‑ up in order to make a "reasonable" profit. The transfer price may then be viewed as an approximate market price.

10. DISADVANTAGES OF TRANSFER PRICING APPLICATION Tax authorities, including:  1. Avoiding tax - companies operating in countries with different tax jurisdictions, deliberately use transfer prices to shift much longer range of earnings in countries with lower corporate tax.  2. Reduced customs revenues - by moving goods from one place to another, a low transfer price reduces customer tax obligation in countries with a high level of this tax, resulting in a reduction of income to the budget from this source. B. Company itself:  1. VTQ- Conflicting objectives - There are times when the use of a certain level of transfer price only serves for short-term goals of the company and creates a problem for the long-term perspective. It should therefore encourage a careful decision on prices which will transfer the goods / services from division to another.  2. An incorrect transfer price leads to inaccurate measurement of performance and lowers motivation  3. Risk to fiscal manipulation -transfer price is an instrument that can potentially be used in conditions where divisions of the same company or related parties operate in countries with different tax regimes. Tax authorities, including:  1. Avoiding tax - companies operating in countries with different tax jurisdictions, deliberately use transfer prices to shift much longer range of earnings in countries with lower corporate tax.  2. Reduced customs revenues - by moving goods from one place to another, a low transfer price reduces customer tax obligation in countries with a high level of this tax, resulting in a reduction of income to the budget from this source. B. Company itself:  1. VTQ- Conflicting objectives - There are times when the use of a certain level of transfer price only serves for short-term goals of the company and creates a problem for the long-term perspective. It should therefore encourage a careful decision on prices which will transfer the goods / services from division to another.  2. An incorrect transfer price leads to inaccurate measurement of performance and lowers motivation  3. Risk to fiscal manipulation -transfer price is an instrument that can potentially be used in conditions where divisions of the same company or related parties operate in countries with different tax regimes.

11. Challenges At Vetoquinol USA  Costs  Standard Gross Margin  Consolidated Gross Margin  Corridor Pricing  Information Sharing  Costs  Standard Gross Margin  Consolidated Gross Margin  Corridor Pricing  Information Sharing 11

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13. Conclusion  The transfer price is the price that one division of a company charges another division of the same company for a product transferred between the two divisions so there are no cash flows between the divisions.  The transfer price becomes an expense for the receiving manager and a revenue for the supplying manager.  The transfer price is used for accounting purposes  VTQ – Transfer price is used as CofG and set Corridor pricing across subsidiaries.  Sometimes the Transfer price yields a local GM that is unfavorable in order to meet the goals of the overall organization  The transfer price is the price that one division of a company charges another division of the same company for a product transferred between the two divisions so there are no cash flows between the divisions.  The transfer price becomes an expense for the receiving manager and a revenue for the supplying manager.  The transfer price is used for accounting purposes  VTQ – Transfer price is used as CofG and set Corridor pricing across subsidiaries.  Sometimes the Transfer price yields a local GM that is unfavorable in order to meet the goals of the overall organization