The design of a transfer pricing system within a multinational group often determines the compensation that can be obtained for the real activities of each subsidiary within the group.
Once the functional responsibilities of the participating entities have been clearly identified through functional analysis, these entities should be grouped according to their respective functional attributes (e.g. production, marketing, R&D, etc.).
From a management accounting perspective, understanding the functional responsibilities of each group company is a key factor in determining the success or failure of the responsibility classification exercise. Therefore, the concept of “functional centres” has also been introduced into the design of the transfer pricing system.
Introducing this concept is to relate the business reality and how multinational companies operate to the appropriate compensation method for each group company.
The responsibility centres of multinational companies generally include:
- Investment Centres;
- Profit Centres;
- Cost Centres;
- Revenue Centres; and
- Expenses Centres.
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