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What is Transfer Pricing?

Malcolm Tatum
By
Updated May 16, 2024
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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.

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.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum , Writer
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Discussion Comments

By anon945281 — On Apr 11, 2014

Is transfer pricing harmful for the host country?

By anon256502 — On Mar 22, 2012

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

By Leonidas226 — On Jan 11, 2011

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.

By Renegade — On Jan 11, 2011

@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.

By Proxy414 — On Jan 08, 2011

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.

By hangugeo112 — On Jan 06, 2011

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.

Malcolm Tatum

Malcolm Tatum

Writer

Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
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