transfer price

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Transfer price

The price at which one unit of a firm sells goods or services to another unit of the same firm.

Transfer Price

The price a division of a company charges a different division of the same company for a good or service. Transfer prices are important especially for large, decentralized corporations where each division reports its own profits and losses separately. The transfer price is usually roughly the same as the market price for the good or service. See also: Section 482.

transfer price

The price at which an item is transferred internally between two units of the same company. An oil company engaged in drilling, refining, and marketing must determine the price of the product as it is passed through the chain from oil field to service station in order to determine the profitability of each stage.

transfer price

the internal PRICE at which raw materials, components and final products are transacted between the divisions or subsidiaries of a vertically integrated or conglomerate firm.

The transfer price charged may be set by reference to the prices ruling in outside markets for inputs and products (arms-length pricing). Alternatively, the transfer price may be set at a lower or higher level than the going market price, according to some internal accounting convention (for example, cost of production plus standard profit mark-up) and the desired ‘profit split’ between the firm's activities. Such administered transfer prices would generally be designed to achieve the firm's overall profit goals, but in transfer pricing decisions there may often be an inherent conflict between the overall goals of the firm and the goals of its subunits. For example, if one COST CENTRE is allowed to transfer components at cost of production plus a specific mark-up, then it has little incentive to minimize its production costs. Again, where a PROFIT CENTRE does not have discretion over its buying or selling prices but must buy or sell some or all of its inputs or outputs to other subunits at transfer prices established by headquarters, then the profit performance of the subunit will not depend solely upon the efforts of local managers, making it difficult to evaluate the performance of subgroup managers and motivate them to improve efficiency.

Transfer pricing gives a firm added flexibility in pricing its products. It may deploy transfer pricing to gain a competitive advantage over rival suppliers (to PRICE SQUEEZE a non-integrated rival), in the case of a MULTINATIONAL ENTERPRISE, transfer pricing provides an opportunity to increase its profits by setting transfer prices across national frontiers in such a way that most of the firm's profits accrue in countries where company taxation rates are the lowest. In addition, inflated transfer prices for components or services may be used to remit surpluses back to the parent company from subsidiaries located in countries which limit the repatriation of profits through dividend controls or EXCHANGE CONTROLS. See INTERNALIZATION, TAX HAVEN, VERTICAL INTEGRATION, DIVERSIFICATION, SHADOW PRICE, MIXER COMPANY.

transfer price

the internal PRICE at which FACTOR INPUTS and PRODUCTS are transacted between the branches or subsidiaries of an integrated firm (see TRANSACTION, VERTICAL INTEGRATION, DIVERSIFICATION). The transfer price may be set by reference to the prices ruling in outside markets for inputs and products (arm‘s-length pricing) or it may be administered (see ADMINISTERED PRICE) according to some internal accounting convention (for example, a FULL-COST PRICE).

Transfer pricing gives a firm added discretion in pricing its products, and the danger is that it could well be tempted to employ ‘manipulative’ transfer pricing to harm competitors (for example, PRICE-SQUEEZE a non-integrated rival firm) and, in the case of a MULTINATIONAL COMPANY, to boost its profits (for example, transfer price across national frontiers so that the greater part of the firm's profits are received in a low-taxation economy).


References in periodicals archive ?
While corporations have many legitimate economic reasons for intra-company transfer prices that appear to differ from prices they may charge externally, tax authorities are concerned with transfer pricing, for among other reasons, because it is a potentially good source of additional revenue.
Transfer prices directly affect the allocation of groupwide taxable income across national tax jurisdictions.
The effect of more and more countries introducing transfer pricing rules has been that, particularly European, countries seem to be not only reviewing the transfer prices achieved by their own tax residents, but also reviewing the pricing, ie the results achieved, by the foreign party to a cross-border connected party transaction.
International transfer prices create opportunities for multinational firms to shift profits between divisions located in high-tax countries to those in low-tax countries.
The most common practice of mentioned tax leakage is through manipulation with transfer prices.
A firm with operations in more than one country must be cautious when setting transfer prices for goods or services sold between divisions.
With the July 31, 2006, issuance date of the revised section 482 regulations, calendar-year companies will have barely five months to read and understand nearly 200 pages of regulations, analyze how those regulations may affect intercompany relationships, conduct transfer pricing studies to determine what useful information about comparable third-party transactions may be available, and then apply that combined analysis to determine not only what transfer prices may be supportable on their returns, but also how any transfer pricing disputes are like to be ultimately resolved with the IRS.
An increased level of transfer pricing audit activity, with 65 percent of parent companies and 59 percent of subsidiaries having experienced examinations of their transfer prices since 2001.
The me of a ULC instead of a Canadian branch also simplifies Canadian transfer pricing issues, as there is more guidance available on establishing transfer prices between two corporations than on determining the profits that should be allocated to a PE under the Treaty.
The Internal Revenue Code contains a set of rules that are designed to insure that related parties determine transfer prices based on an arm's length standard, meaning at prices that non- related parties would agree upon.
To avoid audits, reassessments and penalties, you must be able to substantiate transfer prices for transactions with related parties.
When the decentralized segments of the organization interact, transfer prices must be established for goods and services exchanged.