What is a transfer price, and can a government regulate it? What difficulties and motives does a parent multinational firm face in setting transfer prices?
What will be an ideal response?
Answer: A transfer price is the amount paid by one unit of a company (domestic or international) for goods or services purchased from another unit of the same firm. As such, a transfer price is needed for every intrafirm transaction. Where buyer and seller are in different tax jurisdictions (i.e., countries), governments are concerned with the possibility that transfer prices are raised or lowered from a "normal" or "appropriate" level in order to avoid taxes. In most countries tax authorities have the right to declare a given international transfer price as a tax avoidance device. Such countries have the right to reset taxable income to a higher level. The motives for the parent MNE are to minimize taxes, and the difficulty is that the burden of proof is on the MNE, not the tax collector, to show proof as to why a given transfer price is reasonable.
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