What principles determine the appropriateness of transfer prices under U.S. regulations?
What will be an ideal response?
Transfer prices are the prices a firm charges its affiliates when selling goods and services to them. These prices are set internally within a firm and thus are not directly determined by market forces. In the United States, the Internal Revenue Service (IRS) specifies that an appropriate transfer price is one that reflects an "arm's-length price"—that is, one that would be observed in a sale of the good or the service to an unrelated customer. The IRS recognizes five methods that can be used to establish an arm's-length price. The methods, in decreasing order of general acceptance to tax authorities, are the following:
1.The comparable uncontrolled price method
2.The resale price method
3.The cost-plus method
4.The comparable-profits method
5.Other acceptable methods
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