Question

What is the purpose of a transfer price? Explain.

Answer 1

Transfer price is the price that is charged by one division of the company from other division for goods or services provided. Goods and services may also be provided to Holding, Subsidiary or a division of the company and the price charged is based on the market prices. To reduce tax burden company use inter company transfer pricing, they charge low from from the divisions which are in low tax countries and high from the divisions which are in high tax countries.

Major purpose of transfer pricing is to allocate profits between the parent with subsidiary or by a division to other divison and other objective is to reduce tax and increase profits.