After recently taking a position at one of the world’s largest financial services firms I’ve needed to hop on the internet many times to find out what something means or how it works etc etc. That has lead me to this post and a series of other to demystify some of the buzz words and financial terms you might now know, yet…
Transfer Pricing
Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services, and funds) transferred within an organization. For example, goods from the production division may be sold to the marketing division, or goods from a parent company may be sold to a foreign subsidiary. Since the prices are set within an organization (i.e., controlled), the typical market mechanisms that establish prices for such transactions between third parties may not apply.
The choice of the transfer price will affect the allocation of the total profit among the parts of the company. This is a major concern for fiscal authorities who worry that multi-national entities may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction. This has led to the rise of transfer pricing regulations and enforcement, making transfer pricing a major tax compliance issue for multi-national companies. – Wikipedia
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28. April 2010 at 3:08 pm
A good simple explanation from the OECD reads:
A transfer price is a price, adopted for book- keeping purposes, which is used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises.