How do transfer pricing methods impact pharmaceutical companies?

Transfer pricing methods are the ways multinational companies allocate costs and revenues among their subsidiaries in different countries. They affect how much tax the companies pay, how they manage their global operations, and how they compete in the market. Pharmaceutical companies face specific challenges and opportunities when using transfer pricing methods, due to the nature of their industry and the regulations they face. In this article, you will learn about the main transfer pricing methods used by pharmaceutical companies, how they impact their financial performance and strategy, and what are the best practices to follow.

1 Cost-based methods

Cost-based methods use the production or distribution costs of a product or service as the basis for setting the transfer price. They are often used when the product or service is not unique or differentiated, and when there is a high degree of integration among the subsidiaries. For example, a pharmaceutical company may use a cost-based method to transfer generic drugs or raw materials among its manufacturing plants. Cost-based methods are simple and transparent, but they may not reflect the market value or the profitability of the product or service. They may also discourage innovation and efficiency, as the subsidiaries have no incentive to reduce costs or increase quality.

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2 Market-based methods

Market-based methods use the prices of comparable products or services in the external market as the basis for setting the transfer price. They are often used when the product or service is highly differentiated or specialized, and when there is a low degree of integration among the subsidiaries. For example, a pharmaceutical company may use a market-based method to transfer patented drugs or research and development services among its marketing and sales units. Market-based methods are more realistic and competitive, but they may be difficult to apply when there are no comparable products or services, or when the market conditions are volatile or distorted. They may also create conflicts of interest or ethical issues, as the subsidiaries may compete with each other or with external parties.

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3 Profit-based methods

Profit-based methods use the profits generated by the product or service as the basis for setting the transfer price. They are often used when the product or service is complex or interdependent, and when there is a high degree of uncertainty or risk involved. For example, a pharmaceutical company may use a profit-based method to transfer innovative drugs or clinical trials among its research and development and regulatory units. Profit-based methods are more flexible and fair, but they may be complicated and subjective, as they require estimating the profits and allocating them among the subsidiaries. They may also require adjusting the transfer price over time, as the profits may change due to market demand or regulatory approval.

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Jorge Alfonso

Talent Guru | Strategic Recruitment Wizard | Employer Branding Maestro | Health Economics Enthusiast
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I think the use of profit-based transfer pricing methods in the pharmaceutical industry underscores the nuanced nature of allocating costs and revenues. In this context, the intricate and interdependent nature of products like innovative drugs and clinical trials necessitates a flexible approach. While profit-based methods offer fairness, the subjectivity involved in estimating and allocating profits adds complexity. Adaptability becomes crucial, as market dynamics and regulatory approvals may prompt adjustments over time. Striking a balance between flexibility and precision is key for pharmaceutical companies navigating the challenges posed by transfer pricing methods in their global operations.

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4 Best practices

The choice of transfer pricing method depends on factors such as the nature of the product or service, the characteristics of the subsidiaries, the objectives of the company, and the requirements of the tax authorities. However, some best practices can help pharmaceutical companies use transfer pricing methods effectively and efficiently. These include aligning the method with the business strategy and value chain, conducting a thorough analysis of functions, assets, and risks, benchmarking against comparable transactions in the external market or within the company, documenting and keeping consistent and transparent, as well as reviewing and updating regularly to adapt to changes in the market or regulations.

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Lilit Sargsyan

Transfer Pricing Leader | Your Partner in Navigating Global Transfer Pricing | Top LinkedIn Leadership Voice
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Pharmaceutical companies need to use transfer pricing methods to manage their tax liabilities. It helps to allocate profits and costs across different jurisdictions to optimize the overall tax burden.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do transfer pricing methods impact pharmaceutical companies?

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1 Cost-based methods

2 Market-based methods

3 Profit-based methods

4 Best practices

5 Here’s what else to consider

Financial Management

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