Transfer price is the amount charged by one division of a business to another division of a business that is operating within the same company. Companies can adjust their transfer price to adjust their profits and tax.
A car manufacturer has Division A which produces LED for cars while Division B manufactures the cars. Division B will purchase LED’s from Division A to install in the cars. Division A should charge the same market selling price to Division B.
If Division A and B are in different countries with different tax rates, both Divisions will adjust their transfer price to avoid heavy taxes. Though tax authorities have a tight check on the transfer price to collect maximum taxes from each division in their respective countries.
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