Transfer pricing means setting special prices between the members of one holding. They are somewhat different from market prices and allow to ensure more profitable trade between partners. It is the cost that is assigned to business transactions within a single trading group.
The purpose of transfer pricing
Transfer prices are used in a number of cases in order to provide favorable conditions for the cooperation of the members of one holding. Functions of such operation include:
• redistribution of total profits in favor of subjects with a low tax rate;
• reduction of taxation. The scheme is very simple and common, leading to the increased interest of the State.
In such activity, there are risks that are controlled by lawyers since penalties can significantly worsen the overall situation.
Transfer price can be set in several ways. The most popular mechanism is called “costs +”. Its essence lies in the need of the producer to cover the costs of manufacturing products or providing services. Fixed profit set by the owners of the companies is also taken into account during the calculation process.