Transfer Pricing in Organizations: benefits and disadvantages

by Emanuel Cruickshank, May 2015

300 words

1 page


What are the major benefits of using transfer pricing in organizations? What are the disadvantages?When a company decides to decentralize some of its operational activities, the financial operations between its departments, divisions or subsidiaries are usually actualized using transfer pricing. Transfer pricing is a useful instrument that can be used in managerial accounting to create more revenue for the entire company, but sometimes may lead to the unwanted consequences. A good example of how transfer pricing may benefit a certain company is when it manages to transfer the maximum amount of goods and services at a high cost to a country with low tax rates. “This will result in the company having more revenue that is subjected to a lower tax rate and less revenue that is subjected to a higher tax rate.” (Manko) However, transfer prices are fraught with many dangers, which depend on the way a company forms them. For example, when a company forms its transfer prices based on the market conditions and the “competitors are selling at distress prices or are engaged in any of a variety of “special” pricing strategies” (Heath), the company may lose a substantial amount of money. When a company uses negotiated transfer pricing, it may face the problem of the prices formed against the interests of the company as a whole. Finally, cost-based pricing can diminish the competitiveness of a certain company because of the increase in costs, which will lead to the increase in price of goods or services. One big disadvantage of the transfer pricing is that sometimes it may lead to the double-taxation of certain goods and services. Such situation may occur when a company obeys the taxation authorities of the two countries, which have conflicting tax laws or regulations. To avoid this disadvantage, firms use transfer pricing inside the trade unions or customs unions. Basically, almost all disadvantages of the transfer pricing can be avoided if a firm operates on a stable market.Works CitedHeath, Huddart. "Transfer Pricing." 1 May 2012. The Fuqua School of Business. 3 September 2012 .Manko, Candice. "Transfer Pricing; Methods, Advantages and Disadvantages." 16 March 2011. Articlesbase. 3 September 2012

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