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 aim to create an internal marketplace for transfers of products and services between an organization's profit center managers.
It belongs to the story that estimates suggest that almost half of world trade is actually trade between entities of MNEs, so reliable transfer prices for this trade is essential for the working of the international tax regime for companies.
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.
Instead of taking the company's own internal prices set on the transaction, which might not always reflect market rates, government agencies issue guidelines that are used to calculate transfer prices.
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.
The CPM determines transfer prices by comparing entity-level operating results with those of uncontrolled taxpayers engaged in similar activities under similar circumstances.
Transfer prices are prices at which a company transfers physical goods, intangible assets or when it provides services to associated companies.