A transfer price is the price at which goods (or services) are sold between divisions of a company, or between companies in the same group (the have the same parent company).
Setting transfer prices raises a number of issues:
- Incorrect prices can distort reported performance, by making some divisions more profitable at the expense of others.
- There are opportunities to avoid taxes by using artificial transfer prices to shift profits from high tax country to a low tax country.
- Artificial pricing can similarly be used for controlling shareholders to profit at the expense of minorities.