Transfer Pricing: The Pricing Technique of Intra Firm Marketing

Definition of Transfer Pricing

Transfer Pricing is defined as a pricing technique in which the price regarding services and products sold between related legal entities within a company is set by the marketers concerned. This pricing technique can be utilized as a procedure of profit allocation to attribute a multinational company’s net loss or profit before tax to nations where it conducts business. Transfer pricing leads to the setting of prices among various divisions within a single company.

Unrealistic Transfer Prices do not impact the overall company in a direct manner. They become a matter of concern when they are misused to lower profits in a particular division of a company that is located in a nation that levies high taxes and raise profit in a nation that can be a tax heaven that levies extremely low or no taxes at all.

Textbooks on Transfer Pricing

Transfer pricing is a pricing technique that marketers need to handle with care to avoid its misuse. Here are some details of relevant textbooks based on Transfer Pricing:

• Guide to International Transfer Pricing: Law, Tax Planning and Compliance Strategies edited by Michael Heimert and Michelle Johnson (Published by Kluwer Law International – Year 2010).
• Transfer Pricing and the Arm's Length Principle in International Tax Law by Jens Wittendorff (Published by Kluwer Law International – Year 2010).

Examples of Transfer Pricing

Example 1: An interesting example of Transfer Pricing can be an instance when a company in USA charges its branch in Germany for a machine, either the USA or German Tax authorities may have to adjust the price after examination regarding the respective tax return. Followed by the adjustment, the taxpayer is usually allowed to make the payments for reflecting the adjusted prices.

Example 2: Another example of Transfer Pricing can be the instance when prices of Gold may have to be adjusted based upon the weight of the actual Gold. It is so as one ounce of ten carat Gold should be half the price of one ounce weighing 20 carat Gold.

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