Transfer Pricing

Posted in Human Resource Terms, Total Reads: 1736

Definition: Transfer Pricing

Transfer pricing comes into equation when the transacting companies fall under the same parent companies. When the decision making process is decentralized  the decision to buy from their affiliated unit depends on  the individual units since they are responsible for their profits, return on investments, financials etc.  This transfer pricing affects their cost.

In the centralized decision making process  however  the  prices are kept  close to the market prices such that  neither the buying or the selling unit faces a loss.  The transfer pricing is usually done for tax evasion by MNC’s by under  accounting of  profits .

This is also beneficial for the  domestic companies which are importing for under accounting their imports  and paying less customs. 

It helps in shifting their profits from a high tax regime to a low tax destination

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