Question

What do you mean by “Transfer pricing”. State the different methods of transfer pricing. Explain its advantages and disadvantages

Answer 1

Transfer pricing is an accounting practice that refers to the setting of prices of goods and services (including those linked with intellectual property like research, patents and royalties) that are exchanged among the subsidiary, affiliate or commonly controlled companies or legal entities that are part of the same larger enterprise. It allows for tax savings for the companies, though tax authorities may contest their claims.

1. Comparable uncontrolled price

2. Resale price method

3. Cost plus method

4. Transactional net margin method

5. Transactional profit split method

These disadvantages are:

(1) There can be disagreement among organisational divisional managers as to how the transfer price should be set.