Transfer pricing refers to the price fixed for the transactions of the goods and services between the individual units/divisions of the same firm.
Objectives of Transfer Pricing
To gain profit is one of the core objectives of the transfer pricing. The profitability of both the divisions involved should be considered and given importance’s as both the divisions are of one firm only. The goods and services can be put at any arbitrary price but it’s recommended to keep the price close to the market price to prevent from hampering the profit margins.
The transfer price also influence taxation. An efficient transfer pricing will help in offsetting the tax liability of one division incurring loss against other division earning profits. The core objective of the transfer pricing is to maximize the overall tax profits of the organization.
3.Performance Evaluation of Individual Units:
Transfer pricing is one of the ways to carry out the appraisal of the individual divisions/Units. Through Transfer pricing the performance of the individual units can be assessed and corrective actions can be taken. This helps in effective decision making and eventually the overall goal of the organization is achieved.
Another objective of Transfer pricing is to measure the international trade. The pricing should be in accordance with the import and export standards and should be precisely measured. The price should not be too low as it will affect the international trade figures.
The transfer pricing should be fixed in such a way that the earnings of the division should be matched with the goals of the parent company. The focus should be on increasing the profit margins of the divisions while not affecting the total profitability of the firm.
6.No import Restrictions:
Transfer pricing ensures free flow of goods by avoiding the import quota restrictions. It helps in importing the items without any restrictions.
7.Transfer of funds:
It aids in transferring the funds to the necessary corporate locations and helps in funding and meeting the monetary requirements.