Transfer pricing is a term used to 'describe all aspects of intercompany pricing arrangements between related business entities, and commonly applies to intercompany transfers of tangible and intangible property.' (PWC)
The different groups within an organization may include:
1. Separate legal entities for tax reporting purposes
2. Cost or profit centers within a company
3. Joint ventures with another company.
Intercompany transactions are growing rapidly and with globalization becoming more complex. Global integration and new business practices are driving multinational corporations to find innovative transfer pricing solutions. An issue earlier considered as internal and very mechanical and static dealt with by the accounting department is gaining recognition as an important tool in corporate strategic planning and decision making
This has lead to stricter penalties, new documentation requirements, increased information exchange, improved training and specialization for transfer pricing.
Transfer pricing benefits organizations in other ways such as enhanced operational performance, minimizes the tax burden, improved cash flows, reduces legal exposures and increases earnings.
Transfer prices are set for transactions of goods, services, technology and finance. The form of transfer prices is generally set as royalties, rents, and interest and unit prices. Traditionally once set, transfer prices remain largely static and are ignored...
On the other hand, the modern approach to transfer pricing is to view it as a proactive means to reorganize business units and restructure transactions in a manner that enhances organization performance and efficiencies at different levels.
We thus find that transfer pricing is a multifaceted exercise that provides a company with internal benefits and reduces external risks. Transfer pricing analysis draws upon knowledge and business experience from many disciplines such
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