advisory transfer pricing framework and sap · pdf file3 pwc transfer pricing • framework...

Transfer PricingFramework and SAP Scenarios

Advisory

20 March 2014

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PwC20 March 2014Transfer Pricing • Framework and SAP Scenarios

Transfer Pricing

Transfer pricing is becoming ever more important aseven numerous mid sized companies have producingand sales entities across several countries.

The legal requirements for determining transfer pricesare as crucial as is the transparency of profitability forall steps of the value chain.

In addition to legal transfer prices, managementtransfer prices are used to set objectives.

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PwC20 March 2014Transfer Pricing • Framework and SAP Scenarios

What we will Cover in this Session

Outline the legal requirements, the related processesand risks and how to deal with them.

Learn in detail how SAP allows to you to track theprofitability for all steps of the value chain for bothlegal and management transfer prices based on anexample for manufactured goods using the cross-company/cross-plant costing solution.

Compare the features of the solution with the materialledger solution.

PwC20 March 2014

Agenda

1 Basic Principles

2 Legal Framework

3 Processes

3.1 Business Models

3.2 Price Determination

4 Functional Analysis

5 Risks

6 SAP Scenarios for Profit and Cost Reporting

6.1 Legal vs Management Aspects of Transfer Pricing

6.2 Scenario for Cross Plant/Cross Company Costing

6.3 Transfer Pricing Using the Material Ledger

6.4 Comparison of Methods

Transfer Pricing • Framework and SAP Scenarios

PwC20 March 2014

Basic PrinciplesSection 1

1Transfer Pricing • Framework and SAP Scenarios

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What is Transfer Pricing all About?Transactions between Affiliated Companies

Only Cross-border transactions between affiliated companies are relevant fortransfer pricing

Difficulty: Transfer of tax relevant profits

The preponderant part of worldwide transactions does not take place with third partiesbut within the group

Affiliated companies

Company BCompany A

CH AbroadTax relevant profits

IC transactions


Section 1 – Basic Principles

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Basic PrinciplesFacts (1/3)

* EU Joint Transfer Pricing Forum)



Not all transactions between companies of a group are relevant for transferpricing, only tax relevant cross-border transactions.

For determining transfer prices, local law is decisive. Statements and guidelinesof supra-national organisations (e.g. OECD, EU JTPF*) also play a central role.

The number and complexity of transfer pricing regulations has significantlyincreased during the last years.

Companies have to be characterised based on their function from a transferpricing point of view. In addition to the function, particularly the risks born andthe commodities used are relevant.

The correct application transfer pricing methods is not sufficient in order tosatisfy the needs of the arm’s length principle. The determined transfer price hasto meet the standards of comparison with transactions with third parties.

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A comprehensive transfer pricing concept does not only cover cross-border flowsof merchandise, but also has to take into account services, immaterialcommodities and financing.

An optimised transfer pricing concepts does not lead to the fact that all the localprofits can be attributed to a principal, but only the transferable part. A basicprofit has to remain with the de-central companies.

In order to guarantee the fulfilment of the arm`s length principle, not onlyexternal transactions between third parties have to be taken into account but alsointernal transactions between the tax payer and third parties.

In Switzerland, a transfer pricing documentation only has to be submitted to thetax authorities on demand.

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Depending on the individual case, there is the possibility to negotiate a deal onthe acceptance of transfer prices with one or several tax authorities (AdvancePricing Agreements).

Aggravation of regulatory rules and tax audits due to the economic crisis.

Increasing pressure on transfer prices and more restrictive requirementsregarding the application and proof of the arm’s length principle.

Potential increase of so called “uncertain tax positions” due to the abovedescribed tendencies.

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Legal FrameworkSection 2


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OECD Guidelines versus Local LawThese 2 Frameworks are Relevant for Transfer Pricing


Section 2 – Legal Framework

• Country specificregulations

• Rules for thedocumentation offunctional analyses andbenchmarking

• Arm’s length principle• Transfer pricing methods• Disputes• Burden of proof/

Documentation• Special topics: Intangible

assets, group services etc.

Local regulationsOECD Guidelines

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The Arm’s Length PrincipleOECD Guidelines

OECD Transfer Pricing Guidelines, paragraph 1.33:

“Application of the arm’s length principle is generally based on a comparisonof the conditions in a controlled transaction with the conditions intransactions between independent enterprises.”



Economically relevant characteristics of a comparable situationmust be sufficiently comparable

Target: Application and proof of the arm’s length principle

Comparable means• that there is no discrepancy significantly influencing the

relevant parameters (e.g. price or margin)• that appropriate measures have been taken in order to balance

existing discrepancies

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The Arm’s Length PrincipleOverview Influence Factors

Land A Land B

Company Y Company Z

Company A Company A1

Transactions• Real assets• Intangible assets• Services• Financing

Price?



Market price?

• Characteristics• Functional analysis• Contractual conditions• Economic situation• Business strategies

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The Arm`s Length PrincipleQuestions to be Answered



Transactions between legal units (or operating site) of the group?

What is the volume and the type of the transactions?

Does the actual determination of transfer prices lead to a profit allocationaccording to the arm’s length principles?

Which financial data are relevant to judge the transfer prices?

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ProcessesSection 3


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ProcessesRecurring Processes on a Yearly Basis


Section 3 – Processes

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ManagementOperating UnitsValue drivers/risks

Definition BusinessModel

BudgetMonitoring/ControllingPrice adaptations

Price Determination

“Core”/local documentationDefence of contracts, etc.

Price Determination

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Business ModelsSection 3.1


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ProcessesBusiness Models (1/2)


Section 3.1 – Business Models

Scenario 1

Buys as much merchandiseas is needed or as can be soldwith a positive margin

Two parties (third or affiliated) are basically free to determine theirway of collaboration within the limits of legal requirements

Possible exchange of merchandise:

Distributionpartner

Entrepreneur

Scenario 2Importer searches for acommodity, buys lot sizesfrom the provider and bearsthe sales risk himself

Wholesaledealer/importer

Provider

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ProcessesBusiness Models (2/2)


Section 3.1 – Business Models

There are as many business models as there are companies and relationshipsbetween companies.

In order to fully understand the business relationship and the value chain, aFunctional Analysis has to be established.

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Price DeterminationSection 3.2


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Overview of Methods Defined by the OECDBased on Turnover, Gross Margin and EBIT

Comparable Uncontrolled Price Method

Resale PriceMethod

Cost Plus Method

Profit SplitMethod

Turnover(COGS)

Gross Margin(OPEX)

EBIT


Section 3.2 – Price Determination

Comparable Profits Method

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Comparison with the price of a similar product for a relation between internalpartners (P1) for third parties.

Comparable Uncontrolled Price Method (CUP)Preferential Use in Case Comparison Prices Exist

TP: Transfer priceP1: Internal

comparison priceP2: External

comparison price

But:• Quantity• Market• Point in timemust be comparable!

AA

AB

Client

X

Y

Client

P2: 900P1: 850TP: 800



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Sufficient third party financial information must be available for comparison.

Resale Price Method RPMApplied for Sales Companies if there is no CUP

AA

AB

Client Client

TP: 800



Client

XXX

YYY

Client

SP: 1000

Purchasing price from a third party

Sales price to a third party

Comparison gross margin of AB(1000–800 = 200) on products from AAwith the gross margin on productscomparable in the widest sense(e.g. same industry)

or

between independent third parties(value 1–value 2) and also functionaland risk profile comparable with AB.

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• Basis: full costs of the company

• Appropriate percentage surcharge on effective costs for the margin

• The transfer price equals the total of full costs plus profit margin

Cost Plus MethodPrimarily Used for Services

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The percentage surcharge must be in line with the Arm‘sLength principle depending on functions, risks and usedresources



Service used in the context of production, R&D and management fees.

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Alternatively used to support findings brought up by a different transfer pricing method.

Comparable Profits MethodIn Case Primary Methods are not Useful or Reliable



AA

AB

Client Client

TP: 800

Client

XXX

YYY

Client

Profit margin ofcomparable companies

Band with e.g.Lower Quartile 3 %Median 6 %Upper Quartile 12 %

Turnover 600’000.–

EBIT 24’000.–

Profit margin 4%

Possible reference figures for the EBIT (depending situation): Turnover, OPEX, assets, equity

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This method is based on the comparison of divisions within a company.

Transaction Based Profit MethodSimilar to Comparable Profits Method



AA 1

AB 1

Client Client

TP: 800

Client

XXX

YYY

Client

AA 2

AB 2

Client

TP: 500 Profit margin ofcomparable companies

Band with e.g.Lower Quartile 3 %Median 6 %Upper Quartile 12 %

Turnover 600’000.–

EBIT 24’000.–

Profit margin 4%

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Profit Split MethodProfit is Split Based on Defined Rules



Split of the total profit of the value chain

or

of the residual profit (the profit remaining after attributing the routine profit)

of the companies involved in a transaction.

The profit of the involved group companies that has been achieved due to inter-company prices is compared to the profit that would have been made ifthe total profit was split to each participating individual companybased on the individual contribution of the company, using afunctional and risk analysis.

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Functional AnalysisSection 4


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Definition of the Functional and Risk AnalysisCriteria for High Quality


Section 4 – Functional Analysis

An analysis of economically relevant facts for all transactions examined:

Functions

Risks

Assets (material and immaterial)

The functional and risk analysis is the basis in order to determine the “appropriate(at arm’s length) price for a transaction”

A functional and risk analysis of high quality

Contains the description of transactions to be documented and of the involvedparties

Is supported by facts (e.g. interviews), contracts and financial data

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Contents of a Functional and Risk AnalysisOverview of Relevant Elements

Elements



Risks

Transactions Functions

Companies Activities

ProductsContracts/Conditions

Markets/Competitions

Financial results

Business ProcessesOrganisation/

Persons

Forecast/ BusinessPlans

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Results of a Functional and Risk AnalysisResults

Results



BusinessUnderstanding

Internal lyComparable Values

Identification of taxpotentials/ risks

Basis for BenchmarkStudies

Basis TransferPricing Doc.

Planning Options

CharacterisingGroup Companies

Transfer PricingMethods

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RisksSection 5


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RisksMinimising by Application of Correct Charges

• Significant risk of correctionby the tax authorities

• Weakened position againsttax authorities

• Penalties


Section 5 – Risks

Charge without effective transaction

Effective transaction without charge

Effective transaction with charge asusually NOT applied to third parties

Effective transaction with charge asusually applied to third parties withoutdocumentation (burden of proof)

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SAP Scenarios for Profit and CostReporting

Section 6


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Legal vs Management Aspects ofTransfer Pricing

Section 6.1


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Legal vs Management Aspect of Transfer PricingDifferent Price According to Reporting Targets


Section 6.1 – Legal vs Management Aspects of Transfer Pricing

Externally oriented view – authoritiesThe aim of legal transfer prices is toallocate profits between legal entities inorder to minimise taxes on a nationaland/or international level.

Legal aspect

Internally oriented view – managementIncentive setting for various entities of anenterprise, legal or non legal, in order toget decisions that maximise the benefit ofthe entire organisation.

Management aspect

Transfer prices determine the allocation of margins, and thus profits, along the valuechain of an enterprise and across production and sales plants and legal entities

The legal aspect is only relevant when selling across legal entities. Themanagement aspect is also relevant when transferring goods within a legalentity, e.g., across production plants.

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In order to support decision making in an efficient way:

Cost transparency needs to be given on all steps of the value chain within anenterprise

The structure of the costs (material, personal, overhead, freight, etc.) and theinternal profit must be available for reporting for all production/delivery plantsand legal entities

Example decision making: Set lower internal transfer prices in order to fully usethe capacity of a production plant of a group when the buying entity also has theright to purchase the same product/service from a third party

Management Aspects of Transfer PricingDecision Support from a Business Point of View



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Handling of Transfer Prices in SAPPossible SAP Scenarios



SAP offers the possibility to handle and report both legal- and management-oriented transferprices and related margins

The legal view and the management view are available in Product Costing (CO-PC) andProfitability Analysis (CO-PA)

In the FI leading ledger, only the legal view is available.

All company codes and plants must be assigned to the same controlling area!

There are two technical options to handle transfer prices to show the margin across allentities of a group:

Supports management and legal view from a• group perspective

and• a local perspective

Supports the legal view from a• group perspective

and• a local perspective

Cross-company code/cross-plantcosting (without using the materialledger)

Valuation in the material ledger

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Scenario for Cross Plant/CrossCompany Costing

Section 6.2


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The cross-plant costing/cross-company code without using the material ledger will beshown in the following scenario using legal transfer price only:

A material is produced in plant CH01 of a legal entity, and transferred to plantCH02 of a different legal entity where it is used to manufacture another materialthat will be sold to a third legal entity within the same group

Intercompany profit will be generated in both transfer steps

Scenario for Cross-Plant/Cross-Company CostingRequired Settings in SAP


Section 6.2 – Scenario for Cross Plant/Cross Company Costing

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The cross-plant costing/cross-company code without using the material ledger willbe shown in the following scenario using legal transfer price only:

A material is produced in plant CH01 of a legal entity, and transferred to plantCH02 of a different legal entity where it is used to manufacture another materialthat will be sold to a third legal entity within the same group

Intercompany profit will be generated in both transfer steps

Scenario for Cross-Plant/Cross-Company CostingThe Scenario will be Shown Based on an Example



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Scenario for Cross-Plant/Cross-Company CostingGraphical Overview of the Scenario

= intercompany sale with profit

ProducingLegal Entity 1

ProducingLegal Entity 2

SellingLegal Entity 1

Plant CH01 Plant CH02 Plant CH03

Material 7 Material 7

Material 11 Material 11

Production ofmaterial 7

Production of material11, using material 7

Sells material 11 to3rd party

= sale to 3rd party



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Scenario for Cross-Plant/Cross-Company CostingStep 1 Transfer Between Producing Legal Entities

Legal entity 1 sells for 1.100,- to legal entity 2. Freight costs of 100.– paid by legal entity 2.

Legal entity 2 uses 1 PC of material 7 to build 1 PC of material 11. Labour costs of 200 .–, overhead of 350 .–



Producing Legal Entity 1

Plant CH01

500.–Material

Labour

Overhead

1.000.–

300.–

200.–

Material 7


Material

Labour

Overhead

Freight

Material 11

Material 1.200.–

Labour

Overhead

200.–

350.–

1.750.–

Material

Labour

Overhead

Freight

IC-Profit

500.–

500.–

550.–

100.–

100.–

Assembly

Freight = 100.–IC-Profit = 100.–

Plant CH02

Material 7

IC-Profit

Cost elementview

Costcomponentview

Revenue 1.100.–COGS 1.000.–

IC-Profit 100.–


IC-Profit 175.–

500.–

300.–

100.–

100.–

200.–

1.200.–

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Scenario for Cross-Plant/Cross-Company CostingBase Material 7, Sending Plant CH01, Cost Element View



Transaction CK11N:

Cost elementview

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Scenario for Cross-Plant/Cross-Company CostingBase Material 7, Sending Plant CH01, Cost Component View



Transaction CK11N:

Cost componentview

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Scenario for Cross-Plant/Cross-Company CostingMaterial 7 in Receiving Plant CH02, Cost Element View



Cost elementview

Cost estimate transferred from plant CH01 – Cost element view including additive costsfor freight and profit – Transaction CK11N:

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Scenario for Cross-Plant/Cross-Company CostingMaterial 7 in Receiving Plant CH02, Cost Component View



Cost estimate transferred from plant CH01 – Cost component view including additivecosts for freight and profit – Transaction CK11N:

Cost componentview

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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH02, Cost Element View



Assembled using material 7 – Transaction CK11N:

Cost elementview

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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH02, Cost Component View



Assembled using material 7 – Transaction CK11N:

Cost componentview

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The cost estimate of material 7 is transferred from Plant CH01 to Plant CH02

• In order to do this, the special procurement key in the material master ofmaterial 7 in the receiving plant needs to indicate that the cost estimate shouldbe transferred from plant CH01

Plant CH01 and plant CH02 belong to different legal entities

The freight and profit will be added to the transferred cost estimate as additive costelements

• In order to have this automated, the dependencies and rules of the freightcalculation need to be defined in customer-specific tables, and an add-onprogram needs to be created reading these tables and updating the additive costs

Scenario for Cross-Plant/Cross-Company CostingProcurement Key, Freight and Profit



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The cost component view and the cost element view are identical for material 7.They are related to a costing variant.

In plant CH02, material 7 is used to manufacture material 11

Stock valuePlant CH01: Material 7 1.000.–Plant CH02: Material 7 1.200.– Material 11 1.750 .–

Scenario for Cross-Plant/Cross-Company CostingCosting Views and Stock Values



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Scenario for Cross-Plant/Cross-Company CostingStep 2: Transfer Between Plants of Different Legal Entities, withProfit

Legal entity 2 uses 1 PC of material 7 to build 1 PC of material 11. Labour costs of 200,-, overhead of 350,-



Material 11

Material 1.200.–

Labour

Overhead

200.–

1.750.–

Material

Labour

Overhead

Freight

IC-Profit

500.–

500.–

550.–

100.–

100.–

Plant CH02

Cost elementview

Costcomponentview

Selling Legal Entity

Material 11

Material 1.750.–

Freight

IC-Profit

50.–

175.–

1.975.–

Material

Labour

Overhead

Freight

IC-Profit

500.–

500.–

550.–

275.–

150.–

Plant CH03


Cost elementview

Costcomponentview


IC-Profit 175.–

Freight = 50.–IC-Profit = 175.–

350.–

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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH03, Cost Estimate Transferred from PlantCH02, Cost Element View



Cost elementview

Including additive costs for freight and profit -Transaction CK11N:

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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH03, Cost Estimate Transferred from PlantCH02, Cost Component View



Cost componentview

Including additive costs for freight and profit – Transaction CK11N:

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The cost estimate of material 11 is transferred fromPlant CH02 to plant CH03

• In order to do this, the special procurement key in the material master ofmaterial 11 in the receiving plant needs to indicate that the cost estimate shouldbe transferred from plant CH02

Plant CH02 and plant CH03 belong to different legal entities

The freight and profit will be added to the transferred cost estimate as an additivecost elements

• In order to have this automated, the dependencies and rules of the freightcalculation need to be defined in customer-specific tables, and an add-onprogram needs to be created reading these tables and updating the additive costs

Scenario for Cross-Plant/Cross-Company CostingProcurement Key, Freight and Profit



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In this case, the cost component view and the cost element view for material 11 aredifferent, as the cost element view treats all components of material 7 as materialcosts

They are related to a costing variant

Stock valuePlant CH01: Material 11 1.750.–Plant CH03: Material 11 1.975.–

Scenario for Cross-Plant/Cross-Company CostingCosting Views and Stock Values



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Scenario for Cross-Plant/Cross-Company CostingMixed Costing

Example: 100 PC of 11 costed, based on 50:50 PC procurement ratio from plant X and Y

Material 11Plant X

Plant Y Material 11

Standard cost = 80.–




If there are procurement alternatives for a material, such as multiple vendors ordeliveries from multiple production plants, a mixed cost estimate can be created

For this purpose, the mixing ratio has to be defined

The cost estimate based on this information will be transferred to the standard price ofthe product in the material master

Plant Z


(80.– x 50 PC) + (70.– x 50 PC)

100

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Scenario for Cross-Plant/Cross-Company CostingMargin Reporting

Valuefields

Cost. Comp.view

Material 11 in Plant CH03Material 11 in Plant CH02



From a group view, the overall COGS are 1.650.− in plant CH02 / 1.700.− in plant CH03.

From a legal entity point of view, the COGS are 1.750.− in plant CH02 / 1.975 .− in plant CH03.

Material 500.–

Labour

Overhead

500.–

550.–

Material

Labour

Overhead

Freight

IC-Profit

500.–

500.–

550.–

100.–

100.–

Material 500.–Material

Labour

Overhead

Freight

IC-Profit

500.–

500.–

550.–

275.–

150.–

The components of the cost component split can be assigned to different value fields in CO-PA

Thus, reporting from the perspective of the plant/company code is possible as well as from agroup view

Valuefields

Cost. Comp.view

Freight

IC-Profit

COGS

100.–

100.–

1.750.–

Labour

Overhead

500.–

550.–

Freight

IC-Profit

COGS

150.–

275.–

1975.–

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In addition to the basic costing variant allowing cross-plant/cross-company code transfers, anadditional costing variant can be created on the level of a plant or legal entity, showing only thetotal cost of the material purchased within the group*

Scenario for Cross-Plant/Cross-Company CostingAuthorisation for Different Views

Local costingvariant

Group costingvariant

Material 11 in Plant CH03Material 11 in Plant CH02



Via access control, group controllers can, e.g., see both costing variants; local controllers canonly see the additional costing variant

* Freight costs could be shown separately if desired.

Material 1.200.–

Labour

Overhead

200.–

350.–

Material

Labour

Overhead

Freight

IC-Profit

500.–

500.–

550.–

100.–

100.–

Local costingvariant

Group costingvariant

Material 1.975.–Material

Labour

Overhead

Freight

IC-Profit

500.–

500.–

550.–

275.–

150.–

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Cost component views (cost element views same as in group costing)

Scenario for Cross-Plant/Cross-Company CostingGroup View and Local View



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The cost component view enables the reporting of intercompany margins for all steps of thevalue chain, i.e., for every plant and every legal entity within the group

• In the example, the profit for the legal view is shown

• It is also possible to show IC profit based on management- determined transfer prices inaddition to the legal view

• This can be done by using an additional cost component for management IC profit

• In the reporting for CO-PA, the cost components can be selected to calculate margins froma local point of view as well as from a group view, based on legal or management margins

In case the single plant or single legal entity should not have the transparency on theintercompany margin and the detailed cost structure of the sending plant, an additionalcosting variant can be created, showing only the total purchasing value in cost estimates

In case of a more complex account determination setup, an alternative cost component splitmight be needed, using the primary cost component split.

Scenario for Cross-Plant/Cross-Company CostingOverview of Functionalities



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Transfer Pricing Using the MaterialLedger

Section 6.3


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Using the material ledger, transfer prices can be calculated using either the legalvaluation view or the group valuation view, based on either standard costs oractual costs

Both scenarios are based on a cross-company code stock transfer, using valuatedstock in transit and require the activation of business function LOG_MM_SIT

Transfer Pricing Using the Material LedgerStandard Costs and Actual Costs


Section 6.3 – Transfer Pricing Using the Material Ledger

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Overview of the approach using the legal and the group valuation

Transfer Pricing Using the Material LedgerLegal Valuation and Group Valuation



• Difference between the valuation priceof the sender and the procurement price(purchase order price) is shown asintercompany profit in the costcomponent view of the actual costcomponent split

• No additional group validation needed.

Legal valuation

• Separate valuation and currency profilein addition to the legal valuation,showing the inter-company profit

• Electronic Data Interchange (EDI)scenario between the sender and receivercompany code for sending invoices

Group valuation

The calculation is based on the actual price of the sender using Business Add-In (BadI)Control of Cross-Company Code Transfers (CKML_CROSS_COMPANY), the usage of theactual price can be suppressed and the standard price can be used instead.

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Transfer Pricing Using the Material LedgerPrerequisites for Using the Material Ledger

Legalvaluation



Activate actual costing with actual cost componentsplit

A new cost component needs to be created for the costcomponent structure in use to store the delta profitfor group costing

Groupvaluation

Electronic Data Interchange (EDI) scenario betweenthe sender and receiver company code for sendinginvoices

Separate valuation and currency profile

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Transfer Pricing Using the Material LedgerFeatures of the Material Ledger

Legalvaluation



Take into account freight costs for intercompanyprofit

Actual cost component split passed to receiving legalentity

Groupvaluation

Roll-up of multi-level valuation differences from thesender to the receiver

Reporting of variances according to responsibility ofeach legal entity

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Business Add-In (BadI) Control of Cross-Company Code Transfers(CKML_CROSS_COMPANY) offers several enhancement options to adapt the SAPstandard functionality

The most important features relevant for intercompany profit calculation andreporting:

• Cost component split can also be transferred in the legal view

• Intercompany profit is based on standard costs of the sender instead of actualcosts

• Define intercompany profit calculation based on a customer-specific algorithm

Transfer Pricing Using the Material LedgerEnhancements of the Material Ledger



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The material ledger also offers the possibility of a third valuation view, the profitcenter view

In the profit center valuation view, cross-company code transfer processes are notmapped multilevel

This means for cross-company code profit centers that no price differences arerolled up and no cost component split is passed on

Moreover, with cross-profit center transactions, no intercompany profit everappears in the profit center valuation view

Transfer Pricing Using the Material LedgerProfit Center View



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Material ledger offers the option to show intercompany profits both from a legaland a management perspective

However, for each of the views, a separate valuation view and costing variant arenecessary

The configuration is more complex than the cost component- based solution,which can deal with both views using a single costing variant

The material ledger should be the preferred solution when actual costs are relevantand when the company code currency and the controlling area currency are notsufficient

Transfer Pricing Using the Material LedgerSummary



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Comparison of MethodsSection 6.4


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Comparison of MethodsCross-Plant/Cross-Company Costing versus Material Ledger



Cross-company/cross-plant costing

• Enhancement needed forIC profit and freight

• No third currency, onlycompany code andcontrolling area currency

• Lower implementationeffort

• Easy config and handling

• Full transparency onmargins legal andmanagement oriented

• Plant and legal entity

• Actual costs possible as well as standard costs

• BAdI for adaptations available

• Variance roll-up possible

• Freight costs are not integrated, enhancement

• Config and handling of high complexity

• Profit only when transferring between legal entities, notbetween plants of the same legal entity

• No management oriented view

• Only legal oriented

Material ledgerLegal view

Material ledgerGroup view

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The choice of the appropriate method to calculate and report transfer prices –using the material ledger legal and/or group view or not using the material ledger– depends on how the responsibility is divided within a group and which decisionauthorization is granted to the plants and/or legal entities

Furthermore, it depends on whether standard costs should be used to determinethe intercompany/inter-plant profit, or actual costs, which currencies are relevantand only if legal or internal transfer prices should be used

Hence, a decision on the detailed setup for an enterprise depends on legalrequirements as well as on the business requirements of the group and the singleentities

Comparison of MethodsDecision on Choice of Method


Section 6.4 – Comparison of Methods

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PwC20 March 2014

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Section 6.4 – Comparison of Methods

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