The price for a product or service that one division of a firm charges to a different division for goods and services offered is thought of as transfer pricing.
Transfer pricing is an accounting and taxes strategy that allows organisations to price transactions both internally and between subsidiaries that have common control or ownership. The practice of transfer pricing applies to both cross-border and domestic transactions.
The cost of charging another division, subsidiary, or holding company for services delivered is determined by a transfer price. The going market price for that commodity or service is usually reflected in transfer prices. Intellectual property, including research, patents, and royalties, can also be subject to transfer pricing.
Transfer pricing establishes prices for goods and services exchanged between subsidiaries, affiliates, or enterprises under shared ownership that are all part of the same bigger organisation. Corporations tend to save money on taxes by using transfer pricing, while tax authorities try to challenge such claims.
Multinational corporations (MNCs) are legally permitted to employ the transfer pricing mechanism to allocate earnings among their many subsidiary and associate entities. Companies can, on the other hand, employ (or abuse) this approach by changing their taxable income and so lowering their overall taxes. Companies tend to use the transfer pricing mechanism to shift their tax liabilities to low-cost tax jurisdictions.
According to the IRS, transfer pricing should be the identical for intercompany transactions as would have occurred if the corporate had done the transaction with a 3rd party or customer. Transfer pricing financial reporting follows stringent requirements and is closely monitored by tax authorities. Auditors and regulators frequently need plenty of documentation. The financial statements may have to be recast if the transfer value is finished erroneously or inappropriately, and costs or penalties could also be imposed.