Question

What is transfer pricing and why is it important?

Answer 1

Transfer pricing is the cost at which the parent company sells the good to its subsidiary in a foreign nation, for example Nokia in Finland sells the goods at $100 to its subsidiary in Spain, then $100 is the transfer price of Nokia.

it is important because it helps the firms to save taxes, transfer the income to lower taxable havens and sets the price between different subsidiaries of the firms in the market. for example India has a tax of 40% on some goods and US has a tax of 10% then the main company will sell the goods to Indian subsidiary at a higher price = less taxes and lower price at US so that all profit occurs at US and they pay less taxes.