Transfer Price

Concept summarized by Sam Mishra, President, Franteractive

The price at which goods / services are transferred across divisions within a firm. This price can be set so as to minimize profits, and hence taxes.

Transfer pricing pays a key role, especially within multi-national organizations operating in multiple countries. In such cases, showing more profits in a lower-taxed country / jurisdiction, and less profits in a higher-taxed country / jurisdiction can result in a firm paying less total taxes, overall. Consequently, transfer pricing can be subject to government regulations.

Transfer pricing can be a complex business decision, with far-reaching implications than just paying lower taxes. For example, suppose a large firm wants to sell off / divest a division for strategic reasons. The firm can show this division to be more profitable than it actually is, by transferring goods / services to the division from other divisions at lower and lower prices year after year.  The division  can  then  become  a more attractive business for prospective buyers.

Since transfer pricing has not only strategic but tax / regulatory implications, big tax audit / business consulting houses like Price Waterhouse and Deloitte have separate "Transfer Pricing" practice areas to tackle complex transfer pricing decisions for their clients.