This video introduces the concept of transfer pricing.
A transfer price is the price charged by the selling division to the buying division for an intermediate product within the same firm. Companies use transfer prices for internal purposes (to coordinate transfers within the firm) and for external purposes (reporting to tax authorities). For internal purposes, companies typically used market-based transfer pricing, cost-based transfer pricing, or negotiated transfer pricing. Companies may use a different transfer price for internal decision-making than the transfer price they report to tax authorities; if they do this, it is known as decoupling. However, most tax authorities require that companies report the transfer price as the price that would have been charged in an arm’s length transaction. Even so, transfer pricing is the source of significant disputes as firms attempt to use transfer pricing to minimize their tax liability.