Legal Definitions - transfer price

A transfer price is the cost assigned to goods, services, or intellectual property when they are exchanged between different divisions, subsidiaries, or related entities within the same larger corporate group. Instead of being determined by an open market, these prices are set internally by the company's management. Transfer prices are crucial for internal accounting, assessing the profitability of individual business units, and for tax purposes, especially in multinational corporations where goods and services cross international borders.

• Imagine a large electronics company, "GlobalTech," that has a division in one country that manufactures microchips and another division in a different country that assembles those chips into smartphones. When the microchip division "sells" its chips to the smartphone assembly division, the price they charge each other is a transfer price. This price isn't what GlobalTech would charge an external customer for the chips; it's an internal accounting figure used to track the profitability of each division and to allocate costs within the company.

• Consider "MediCorp," a global pharmaceutical company. Its research and development (R&D) arm, located in Switzerland, develops a new drug formula. When MediCorp's manufacturing subsidiary in Ireland uses this formula to produce the drug, the R&D arm charges the manufacturing subsidiary a fee for the intellectual property and development services. This internal charge is a transfer price. It helps MediCorp determine the R&D division's contribution and allocate the development costs across the products and regions that benefit from the new drug, impacting the tax obligations of each subsidiary in their respective countries.

• A major clothing retailer, "FashionForward," operates numerous stores across several states. FashionForward also owns a central distribution center that purchases clothing from suppliers, stores it, and then ships it to individual retail stores. When the distribution center sends a shipment of jeans and shirts to a store in California, it charges that store an internal fee for the goods and the logistics services. This internal charge is a transfer price. It allows FashionForward to evaluate the performance of both the distribution center (as a service provider) and the individual stores (as profit centers), ensuring that costs are appropriately allocated throughout the organization.