Transfer prices between related companies

Abstract

Prices are not fixed on the free, open market. They may vary from prices that are negotiated between unrelated trading partners in a comparable transaction in equal circumstances. If the goods and services involved in the transaction between associated parties are overrated, the seller’s profit is increased and the buyer’s profit is lowered. Conversely, if the goods and services are underrated, the buyer’s profit is increased and the seller’s profit is lowered. The abuse of transfer pricing policies exists when profit and expenses are allocated because of the reduction of taxable profit. Transfer prices on multinational companies level (holding), which consists of the parent and subsidiaries, has multiple effects. There exist several methods of determining transfer pricing.