Transfer pricing refers to the prices charged for goods and services transferred between divisions of a multinational company operating across international borders. The objectives of transfer pricing include reducing taxes, managing cash flows, and avoiding conflicts with governments. Common transfer pricing methods are market-based prices, cost-based prices, and negotiated prices. Transfer pricing allows companies to shift profits between countries to minimize taxes but also presents challenges in terms of performance measurement and conflicts with tax authorities.

1. Transfer Pricing – International Marketing Overview

7. Figure 1.0 Hiding Profits with Transfer Pricing GREAT BRITAIN JAMAICA UNITED STATES An item costs $100 to produce. It is sold to a Jamaican subsidiary for $100. Tax rate: 52% Tax paid: $0 The Jamaican subsidiary resells the item for $200 to a U.S subsidiary. Tax rate: 5% Tax paid: $5 The American subsidiary sells the item at a cost for $200. No profits earned. No tax paid. Tax rate: 34% Tax paid: $0

8. Benefits of Transfer Pricing 2. Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries 1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low 3. Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred