Transfer price defined as the price charged for goods for services supplied by the parent corporation to the subsidiary or vice-versa or by one subsidiary to another. The basic objective of a TNC is to maximize group profits. This may necessitate showing, on paper, more or less profit being earned by one unit than what has been actually realized. This. brings us to the manipulation of transfer prices as a deliberate policy of a TNC. A TNC can use transfer pricing for following purposes:
- Transfer pricing is used to reduce tax incidence. Through appropriate transfer pricing TNCs reduce high direct and indirect taxation not only in host countries, but also in home country.
- Transfer pricing is used as a marketing technique. Transfer pricing may support a market position of a product or enhance its market share.
- Transfer pricing may used by a TNC to reduce the profit-sharing by the collaborator with it.
- Transfer pricing is also used to insulate tile adverse impact of volatile exchange rate.