transfer price

Also found in: Dictionary, Acronyms.

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 ?
Transfer Price = Variable cost/unit + Lost contribution margin/unit
We assume a partially decentralized MNF, so the headquarters determines the transfer price and the downstream branch determines the level of the final output.
Some companies have experienced the pain of not getting their transfer prices right in the eyes of the IRS.
The manufacturing segment is the sole source of supply for the distribution segment and sets the transfer price for the goods ordered by the distribution segment.
Companies can determine a market-based transfer price by comparing current prices if the business unit also sells to the market.
The resale price method was used, and the APA was based on an outbound transfer price (see Exhibit 2 for a glossary of terms).
However, because the arm's length principle cannot always be applied with full precision, it leaves some room for reasonable interpretation; and companies will use that room to structure their transactions and transfer prices to enhance the bottom-line and shareholder value while still complying with tax rules.
Assume that Sigma's policy is to set prices by applying a markup of 30% over variable cost; thus, it sets the transfer price at $13 ($10 x 130%).
To assist the subsidiary in B to make an appropriate quantity decision, the MNE uses a transfer price on the good shipped from A to B.
Because transfer prices can play a role in determining the distribution of income among the members of a controlled multinational group, transfer pricing also affects the tax provision of a multinational through its effect on unrepatriated earnings.
A second issue is the selection of a transfer price, a process complicated by decentralized organizations that grant managers the right to set prices, which in turn affects their performance evaluations and rewards.
The guidelines apply the "arm's length" principle mandated by the OECD, which stipulates that a transfer price should be the same as if the corporate entities involved were independent and not part of the same corporate structure.