Question

What is your understanding of Transfer Pricing in multinational trade?

Answer 1

The price at which division to division semi-finished goods are transferred for making the goods fully-finished is known as transfer pricing. Basically this price includes material cost and labor cost; but if the entity is multinational, there might be several divisions around the world which are treated like separate entity. These multi-entity divisions are run independently. In such case, the transfer prices between those divisions are also included with some profit of that division. Therefore, the transfer price would then become as (Material cost + Labor cost + Divisional profit).

This is to be remembered that whatever be the transfer price it should not go beyond arm’s length transaction, which means a realistic price.