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What is Transfer Pricing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 December 2014
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Transfer pricing is the rates or prices that are used when selling goods or services between company divisions and departments, or between a parent company and a subsidiary. The pricing that is set for the exchange may be the original purchase price of the goods in question or a rate that is reduced due to internal depreciation. When used properly, it can help to more efficiently manage profit and loss ratios within the company. Generally, transfer pricing is considered to be a relatively simple method of moving goods and services among the overall corporate family.

In situations where the transportation of goods is involved in the transaction, the rates may include both a fixed price per unit transferred, plus additional charges to cover the cost of shipping. This model is especially helpful when the transfer takes place between a parent company and a subsidiary. The larger entity can arrange the shipping through a discounted shipping plan that the smaller entity may not be able to access. The end result is that the pricing makes it possible to move the goods with the smallest amount of expense to the company as a whole.

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In addition, transfer pricing is a great way to move goods from one company division or department to another without generating a lot of postings on the accounts receivable and accounts payable books. The value of the goods is simply moved from one division to the other, a process that greatly simplifies the process. Normally, there is a simple form that accompanies the physical transfer of the goods, and it is used by both the sender and the recipient to make appropriate posts in company accounting records. This process eliminates the necessity for invoices, tariffs, internal bills of lading, and other documents that would normally apply to a new purchase using an outside vendor.

While the main purpose of transfer pricing is to enhance the overall value of the corporate family of companies, there are instances when this type of transaction can be abused. This is especially true when transfers to international locations are conducted. Today, many countries have regulations to help prevent the use of this pricing method as a means of evading taxes or similar unethical and illegal activities.

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Discuss this Article

anon945281
Post 7

Is transfer pricing harmful for the host country?

anon256502
Post 5

What institutions offer courses on transfer pricing and which one is the best?

Leonidas226
Post 4

In multinational transfer pricing, companies sometimes participate in a sort of "gray market" where international law may be unclear or unestablished. This may allow for more flexibility in the company's transfer pricing methods, making outsourcing an appealing option for many businesses.

Renegade
Post 3

@Proxy414

It is a good question and I think it may vary by state and company. Many companies keep both physical and computerized records to ensure the safety of their documents, and will nevertheless discard records from over a decade in the past.

Proxy414
Post 2

Since large storage facilities may sometimes be necessary to house the compendious amounts of files needed to record transactions in the extent to which they are made in big business, I wonder how many companies are switching to a more compact technological solution, which would also be easier on the environment since not requiring so much paper.

hangugeo112
Post 1

Managing the books in accounting and keeping track of the various intercompany transfer pricing is both legal and economic in nature. Understanding the parameters of business ventures and the necessary tax documentation is essential in big business.

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