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).

See INTERNATIONALIZATION, TAX HAVEN, SHADOW PRICE, MIXER COMPANY.

References in periodicals archive ?
Miesel as a partner, National Transfer Pricing Practice leader and chief economist.
The meeting provides a platform for ECOWAS countries to take stock of the current state of transfer pricing in the region and to determine the direction of further progress.
His experiences include bilateral and multilateral APAs and Mutual Agreement Procedures, design, planning, documentation, implementation and defense of complex transfer pricing structures, transfer pricing controversy/dispute resolution/audits, tax and transfer pricing control frameworks.
The transfer pricing landscape has changed considerably in the quarter century since the APA program was launched.
Keywords: transfer pricing, tax avoidance, intangibles, arm's length principle, profit allocation
THE government has directed the Income Tax ( IT) Department to keep in mind the rationale behind the Bombay High Court ( HC) verdict in the Vodafone transfer pricing case when dealing with similar cases.
Rather than assigning "control" of transfer-pricing issues to either group, the document states that it is "imperative that TPP and IBC work transfer pricing issues together, as a unified team.
In the absence of market prices, an organization is left with a cost-plus transfer pricing scheme.
Complaints from MNEs often concern that transfer prices for tax purposes conflict with transfer pricing for internal management purposes.
Commenting on the growing importance of transfer pricing, Finbarr Sexton, Head of Tax, EY Qatar, said, "Tax authorities globally are increasingly focusing on transfer pricing as a 'high risk' tax issue and the recent Organisation of Economic Co-operation and Development (OECD) report on base erosion and profit shifting has highlighted transfer pricing as a 'key pressure area'.
However, the impact of transfer pricing could also apply, for example, to a small, closely held manufacturing company in Canton, Ohio, looking to expand overseas.
The values determined within the transfer pricing framework vary, often significantly, from the values determined for financial reporting purposes.