What is International Transfer Pricing?

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  • 0:03 International Transfer Pricing
  • 0:51 Problems Moving Goods
  • 1:28 Final Effects of…
  • 2:17 Example
  • 3:28 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Many companies that have subsidiaries have to deal with different types of transfer pricing. However, what do you do when the transfers cross national boundaries? In this lesson, we look at international transfer pricing.

International Transfer Pricing: Defined

Chances are that when you travel, you have to exchange currency. Sure, some countries do accept the dollar as a currency, but unless all of your travel plans can be completed in El Salvador or Palau, you'll probably have to exchange currency. With fees, commissions, and differences in exchange rates, the whole process can be rather maddening.

Companies have to do the same thing whenever they want to transfer goods or services between subsidiaries that are located in different countries. That means that they get to go through all the headaches of currency exchange but have to move goods alongside it all. International transfer pricing, or the process by which companies transfer money and goods between subsidiaries, is thus an important part of international business.

Problems Moving Goods

However, there are some problems that arise when you move goods internationally. If you were to transfer goods from New York to Chicago, it would be as simple as putting them on a truck and stopping for gas along the way. But, moving goods between countries is much more complicated. In many events, goods have to be shipped, held in customs, have tariffs paid, and undergo any other number of costs and delays. Of these, clearing customs often presents the biggest hurdle. Many countries tax items as they leave or arrive in the country. Making sure that these taxes are being paid correctly can be complicated.

Final Effects of Transfer Pricing

Meanwhile, what about the money? Remember that different types of transfer pricing present subsidiaries with different profits. The country that the goods are being produced in may have higher taxes on profits, so it would be beneficial for the country in question to use a more cost-based transfer pricing system to get around that. However, profits could be routed to a country in which tax rates are much lower.

Is this all starting to sound legally - and even ethically - questionable? You're right to be a little uneasy. Countries try to crack down on corporations using these strategies to create tax havens that help them dodge taxes on profits. Meanwhile, companies face outrage from citizens of their home countries who often see companies' attempts at hiding their tax dollars as cheating out of their responsibility.

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