Transfer pricing is the pricing of intercompany transactions that take place between associated businesses. The transfer pricing procedure establishes the amount of income that each party makes from that transaction. Taxpayers and the taxing authorities center solely on related-party transactions, which are termed controlled transactions, and have no direct impact on sovereign party transactions, which are termed uncontrolled transactions. Transactions, in this context, are determined generally, and include sales, licensing, leasing, services, and interest.
Due to the intricacy of today’s work world, traditional theories of transfer pricing from the management or economics discipline may prove independently inadequate as the basis for executive decisions. Transfer pricing has many dimensions; it includes “much more than fiddling with prices on intra-company transfers of goods.” (Lessard, 1979)
Transfer prices affect a product’s local content any increase (decrease) in the transfer price affects local content ratios without altering the substance of a transaction (Halpern, 1991). Firms who would benefit from import shield made income-decreasing accounting choices during the import relief investigation period. Economists feel free to trade benefits all. However, Lall (1973) felt the home country of a multinational might gain unfairly at the cost of a less developed host country.
The concept of an international corporate headquarters of a multinational corporation that employs transfer pricing to minimize worldwide taxation is no longer feasible. Two impediments limit the use of transfer pricing to achieve tax minimization: (1) the tax authorities are aim on their own revenue maximization by thwarting the taxpayer’s tax minimization plans, and (2) non-tax considerations may be more important in taxation than a tax. (Feinschreiber, 2004)
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