Can I exclude transfer pricing from EBITDA?
Can transfer pricing be excluded from EBITDA?
Transfer pricing — the sales price that an item is sold between companies with common ownership — per the IRS, should be the same as the item is sold to non-company owned entities.
I.e, if you sell a widget for $10 to John Q Public, that’s the amount you should sell to Company B, who is also owned by the Common Holding Company.
That said, at the end of the day, EBITDA is EBITDA for both subsidiaries and the consolidated company as if the item was sold publicly.
The real reason for transfer pricing has to do with the taxes paid, and where those taxes are paid. Particularly when the company is global. There are many countries with lower tax rates than the US. Moving income to those companies would save the entire enterprise significant amounts on taxes.
But from a purely EBITDA standpoint, it should have no real effect at the holding company level, since you’re looking at earnings before interest, taxes, depreciation and amortization.