Key differences between a toll and contract manufacturer from a transfer pricing perspective
Please see below a brief characterisation of a toll manufacturer and a contract manufacturer, as well as the key differences between them from a transfer pricing perspective
Toll manufacturing versus contract manufacturing
Toll manufacturing is a process in which a company is responsible for the processing of raw materials or semi-finished products into finished products. Such companies provide the plant, machinery and labour force necessary to manufacture the relevant product. It is not responsible for the procurement of raw materials. The contracting company supplies the relevant raw materials, and will often also have ownership of all the intellectual property relating to the products, such as patents and trademarks. For transfer pricing purposes, the nature of the relevant intercompany transaction is the provision of a manufacturing service.
Contract manufacturing is also similar to the above process. The difference between the two processes is the supply and usage of the raw materials used in the production process. In contract manufacturing, the company is responsible for the procurement and processing of raw materials in order to produce the final product. This implies that the manufacturer will bear related risks such as the cost, the level of stocks, and control over the quality of raw materials to be used. For transfer pricing purposes, the nature of the relevant intercompany transaction is the supply of products.
| Toll manufacturer | Contract manufacturer |
Functions | Manufacturing only | Procurement and manufacturing |
Risks | Limited volume and restructuring risks | Limited inventory, volume and downsizing risks |
Intangibles | Limited process know-how | Process know-how and supplier relationship |
Inventory | No title to inventory | Title to inventory |
Transaction structure | Rendering of a production service | Supply of finished goods |
Typical remuneration | A cost based remuneration, excluding the value of the raw materials | A cost based remuneration, including the value of the raw materials |
Characterisics of Toll manufacturing
- Functions: Manufacturing only
- Risks: Limited volume and restructuring
- Intangibles: Limited process know-how
- Inventory: No title to inventory
- Transaction structure : Rendering of a production service
- Typical remuneration: A cost based remuneration, excluding the value of the raw materials
Characterisics of Contract manufacturing
- Functions: Procurement and manufacturing
- Risks: Limited inventory, volume and downsizing risks
- Intangibles: Process know-how and supplier relationship
- Inventory: Title to inventory
- Transaction structure : Supply of finished goods
- Typical remuneration: A cost based remuneration, including the value of the raw materials
Manufacturing transactions
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