Transfer Pricing
Transfer pricing is when a company sets the prices for goods or services sold between its different divisions or subsidiaries. It involves determining the price at which one part of the company sells a product to another part of the same company.
Example #1
For example, a multinational company has a manufacturing division in Country A and a sales division in Country B. The manufacturing division sells its products to the sales division. The transfer price is the price at which the products are sold from one division to another within the company.
Example #2
Another example is a company owning multiple retail stores where products are transferred between stores at internal prices set by the company.
Misuse
Misuse of transfer pricing can occur when companies manipulate prices to shift profits to low-tax jurisdictions, thereby reducing their tax burden in high-tax countries. This can lead to unfair tax avoidance practices that impact the overall tax revenue of countries where the company operates.
Benefits
On the positive side, transfer pricing allows companies to efficiently allocate resources within the organization. It helps in evaluating the performance of different divisions, incentivizing cost-effectiveness, and promoting optimal decision-making.
Conclusion
It's crucial to monitor transfer pricing to prevent tax evasion and ensure fair taxation. Consumers and employees benefit from a transparent and accountable system that upholds fair practices and prevents companies from exploiting loopholes for their gain.
Related Terms
See Also
Base Erosion And Profit Shifting (BEPS)