A pricing policy is not only one of the factors of a guaranteed solvency of an organization, including tax payments, but also a crucial element of an organization business as a whole that, if selected properly, can ensure both acceleration of advanced capital turnover and rise in its yield.     Generally, the simplest mechanism of pricing looks as follows.

Organization wholesale price is calculated by adding of the target profit to the total cost (cost-plus method):

                                               P = C + P                                                                 

Where the total cost means the amount of costs of used manufacturing resources:

                                               C = М + А + U,                                                        

 where М – materials;

           А – amortization charges;

           U – remuneration.

           Pricing by stages reflects the quantitative correlation between prices that develop as goods (works, services) move from the producer to the end consumer. The price at each previous stage of the goods movement forms a part of the price at each following stage. Different types of pricing in the course of goods (works, services) movement are shown in Table 1.

Table 1 

Pricing scheme in the course of goods (works, services) movement

Price components
Cost of production and sales of goods(works, services) Manufacturer profit  Indirect taxes Intermediary markup Markup
excises VAT Intermediary expenses Intermediary profit Intermediary VAT Selling expenses Profit VAT
Manufacturer’s wholesale prices  
Wholesale prices for sale  
Wholesale prices for purchase  
Retail prices            


            Manufacturer’s wholesale prices are formed at the goods (works, services) production stage. These are interim prices and have to offset manufacturer’s costs of production and sale of goods (works, services) and secure its target profit.

           Wholesale prices for sale apart from manufacturer’s prices include indirect taxes, namely excises and VAT. These prices ensure indirect tax charge that form an important part of the federal budget income.

           Outside the manufacturing company the wholesale prices of intermediaries, wholesale and retail organizations are formed. They include supply and sales markup of intermediaries, wholesale markup of wholesale commercial organizations and retail markup.  

           Wholesale prices for purchase are formed when an intermediary comes into action. They include intermediary markups (discounts) to the wholesale prices for sale. These prices provide enough financial support for the intermediary performance.  An intermediary discount (markup) may have different names in Russian practice (e.g. a supply and sales discount, or a markup, a commission or a fee, etc.), but in any case it is a cost of intermediary services for the transfer of goods from a producer to a consumer.

           In absolute terms an intermediary discount coincides with a markup, as they represent a difference between two prices. The difference between “discount” and “markup” notions arises when they are considered in relative (percentage) terms. In this case a markup is an additional charge to the purchase price of a supplier, and a discount – a part of the end selling price left available to an intermediary.

           Intermediary discount (markup) is used to compensate intermediary selling expenses, VAT payments and costs of profit generation.  VAT rates for intermediary organizations are applied to intermediary discount (markup) in percents.

           It seems that during the final pricing it is necessary to take into account not only indirect taxes such as excises and VAT, but also specific features of tax base development for underlying taxes and their interference. The summary table given below contains the most common formulas used in price decision-making, where the influence of tax regimes is taken into account (Table 2).

Table 2 

Formulas used in price decision-making

Measure Arithmetic formula Notations in arithmetic formulas
Formulas used in price decision-making
Price net of taxcostsPnotc         Pnotc = Ca x (1 = Ps)   Ca – costs per unit in accounting Ps – profitability expressed as a standard
Price including taxcosts except for those paid from net profit(Pitc)                    (Pitc Rit х CtIT)Pitc = ——————————            (1 – Rcv Rit Rcv х Rit )                     (Pnotc – 0,24 х Ps VD)Pitc effect.= —————————                   (1-0,15 -0,24+0,15х0,24) (whereas income tax rate -24%, VAT – 18%)  Pnotc – price net of tax costs;Rit — income tax rate (in unit fractions);Ct – costs per unit in tax accounting;VD — VAT subject to deduction per unitRcv — computed VAT rate (in unitfractions)
Computed VAT rate (in unit fractions) (Rcv )                      RcVAT, %Rcv = ————————          (100% + RcVAT, %) RcVAT, % — current VAT rate in percentage
Price including basic types of taxcosts (Pbtc)  Pbtc = Pitc  + TCnp   : Q Pitc – price including tax costs except for those paid from net profit;TCnp — tax costs against net profit;Q – quantity of items
Price minimum(without tax consequences for the seller)(Pmin)  Pmin = Pt х (1 -0,2) Pt — typical selling price for identical (homogeneous) goods of the organization in question 
Rise in income tax due to the transaction price, deviating from the usual one (∆Ti) by more than 20%   Ti = (PmPdev) х Rit  х Q Pm — market price in accordance with the article 40 of the Tax Code of the Russian Federation;Pdev — price for the goods on sale, deviating from the usual transaction price by more than 20%;Rit — income tax rate (in unit fractions);Q – quantity of the units on sale



Find the minimum selling price which will allow an organization not only to cover all its expenses, but also to receive 30% profit margin on costs.

The conditions of the price decision-making were the following.

              At the beginning of the year an organization fixed price for the product – 180 rubles per item (including VAT), but the sales dropped. The organization sells 10 thousand product units per month, its expenses in the accounting – 980 thousand rubles, in the tax accounting – 1050 thousand rubles, expenses charged against net profit – 50 thousand rubles, VAT amount subject to tax deduction per unit – 15 rubles. 

1)980 000 руб. х (1 + 0,3) : 10 000 items = (127,4 rub. — unit price net of VAT, computed traditionally;

2)18% : 118% = 0,15 – computed VAT rate (if rate is 18%);

3)1050 000 rub. : 10 000 items = (105 rub. — costs in tax accounting per unit;

4)(127,4 rub. – 105 rub. х 0,24 – 15 rub.) : (1 – 0,15 – 0,24 + 0,15 х 0,24) = 87,2 : 0,646 = = 135 rub. — unit price net of expenses, charged against net profit;

5)135 rub. + 50 000 rub. : 10000 = 140 rub. — final unit price.

The above calculation shows that the least reasonable price in the mentioned conditions is 140 rubles. However, the actual price can be higher due to the demand flexibility.


Tax control of prices restricts price decision-making to a certain extent and hampers further organization growth. Tax restrictions of business activity that should be taking into account during price decision-making are shown in Table 3.

 Table 3

 Tax restrictions of business activity taking into account during pricing policy development 
Measure Calculation method Notation explanation
Price minimum(without tax consequences for the seller)   Pmin=Pu * (1 – 0,2)      Pu — usual selling price for identical(homogeneous)goods* of the organization in question. 
 Rise in income tax due to the transaction price, deviating from the usual one by more than 20%   DIT=(Pm-Pdev)* *Rit*q     Pm — market price in accordance with the article 40 of the Tax Code of the Russian Federation;Pdev — price for the goods on sale, deviating from the usual transaction price by more than 20%;Rit — income tax rate (in unit fractions);q quantity of the units on sale 

 ×) Identical goods are goods with the same up-to-dated characteristic features (physical characteristics, quality and market reputation, country of origin,and manufacturer); Homogeneous goods are goods that are not identical, but have similar characteristics and similar structures what enables them to performthe same functions and be commercially interchangeable.





                  An organization produces electric hot plates and sells 400 plates per month at 25 thousand rubles per item (net of VAT). It incurs temporary costs of 15 thousand rubles per item and permanent costs of 3.5 mln rubles. In order to increase profit before tax by 300 thousand rubles the organization is considering the opportunity to sell another 150 plates at lower price, which is to be calculated.

                Let us analyze such decision taking into account tax consequences, if the market price for the identical goods in this region is 24 thousand rubles.

Let’s make calculations:

1)as additional production output does not bring about higher permanent costs, the computable price has to cover additional temporary costs of production of 150 plates (15 thousand rubles x 150 items) and profit of 300 thousand rubles, so the price will be 17 thousand rubles ((15 thousand rubles x 150 items + 300 thousand rubles): 150);

1.       25 thousand rubles – 25 thousand rubles x 0.2 = 20 thousand rubles – the lowest price level that does not bring about any tax consequences.   The organization cannot justify extra discounts, e.g. on the back of seasonal or other factors of consumer demand volatility; deterioration of goods quality or any other consumer features, expiration (near expiration) of goods or sales term; marketing policy, including promotion of new goods with no analogues, and promotion of goods in new markets, selling of test models and goods patterns to introduce them to consumers;

2.       (24 thousand rubles – 17 thousand rubles x 0.24 x 150 items = 252 thousand rubles – extra income tax that arises because  the transaction price deviating from the usual one by more than 20% is used;

3.       300 thousand rubles x 0.24 = 72 thousand rubles – income tax that arises due to increase in profit before tax by 300 thousand rubles;

4.       252 + 72 = 324 (thousand rubles) – total extra income tax;

5.       300 – 324 = -24 (thousand rubles) – drop in net profit in the case of sale of additional products at 17 thousand rubles per item.



Conclusion:  The above example of price lowering for additional electric hot plates to 17 thousand rubles per item indeed results in rise in profit before tax by 300 thousand rubles. At the same time the income tax increases by 324 thousand rubles, and, therefore, net profit falls by 24 thousand rubles compared to the original one. That’s why this method is not cost-efficient, and it seems reasonable to look at possible increase of sales and reduction of price to no less than 20 thousand rubles per item.