when transfer pricing occurs companies can manipulate profits of goods and services in order to book higher profits in another country that may have a lower tax rate in some cases the transfer of goods and services from one country to another within an intracompany transaction can also allow a company to avoid tariffs on goods and services exchanged internationally the international tax laws are regulated by the organisation for economic cooperation and development oecd and auditing firms within each international location audit the financial statements accordingly 2
transfer price exampleto better understand the effect of transfer pricing on taxation let s take the example above with entity a and entity b assume entity a is in a high tax country while entity b is in a low tax country it would benefit the organization as a whole for more of company abc s profits to appear in entity b s division where the company will pay lower taxes in that case company abc may attempt to have entity a offer a transfer price lower than market value to entity b when selling them the wheels needed to build the bicycles as explained above entity b would then have a lower cost of goods sold cogs and higher earnings and entity a would have reduced sales revenue and lower total earnings companies will attempt to shift a major part of such economic activity to low cost destinations to save on taxes this practice continues to be a major point of discord between the various multinational companies and tax authorities like the internal revenue service irs the various tax authorities each have the goal to increase taxes paid in their region while the company has the goal to reduce overall taxes 