A transfer price, also known as a transfer cost or a transfer price, can be used to trade supply or labor between departments. Transactions between a parent company and one of its subsidiaries, or transactions involving subsidiaries from the same company located in different countries, can use transfer prices. In the case of a lower transfer price than market value, one entity will benefit, while the other’s profits will be negatively affected. Corporate profits can be moved to countries with lower tax rates by manipulating the transfer prices of goods and services, which is referred to as profit shifting (Choi et al., 2020). In order to address this issue, regulations enforce the arm’s length transaction rule, which requires pricing to be based on similar transactions done by unrelated parties. However, for tax purposes, multi-entity corporations can report each entity separately. To put it another way, the “transfer price” refers to how much one company or subsidiary pays another for the purpose of reporting its own profits. A transfer price is used to calculate the costs of doing business with these parties.
Companies’ appetite for transfer price risk rises sharply when revenue and liquidity fall. Holding onto and/or releasing limited resources may be an option when the company’s survival is at stake. As the economy gets tougher, it may become more important to document the reasoning and background for each decision. It may be beneficial to include loss-making companies in comparisons and to update the analysis based on decreased business volumes in the same industry when determining transfer prices (Choi et al., 2020). Though tax authorities are likely to be more vigilant, the pre-crisis transfer pricing system is still preferable. It’s critical to keep track of recent decisions and the reasoning behind them in order to stay on top of the current situation. By documenting the current situation, it is possible to minimize the risk of future audits. The current economic climate also impacts transfer pricing, as it affects both supply and demand. Internal transfer pricing is shifting because of the decline in corporate activity and revenue. A more accurate description would be that we are experiencing an exceptional time period. Transfer pricing policies that take the long term into account can reduce administrative burdens.
Reference
Choi, J. P., Furusawa, T., & Ishikawa, J. (2020). Transfer pricing regulation and tax competition. Journal of International Economics, 127, 103367. Web.