Furthermore, transfer price accrues between two organization or parties (e.g., a parent company and its controlled foreign corporation) in an inter-company transaction.
Commonly, transfer pricing is considered that price of goods and service already sold between both parties to focus on tax: companies considers reduction of tax on company profit.
Transfer pricing methods are ways of establishing arm’s length prices or profits from the transactions. The arm's length principle requires the condition or the fact that the parties (or associated enterprise) of a transaction are independent and on an equal footing.
The arm’s length principle is the generally accepted guiding principle used in establishing acceptable transfer prices.
There are four main theoretical concepts for a transfer price. These concepts are:
• the external market or arm’s length transfer price
• the efficient transfer prices
• the profit maximizing transfer price
• the economic transfer price that is suitable for collection by a statistical agency.
Transfer pricing
