what is transfer price 
transfer price also known as transfer cost is the price at which related parties transact with each other such as during the trade of supplies or labor between departments transfer prices may be used in transactions between a company and its subsidiaries or between divisions of the same company in different countries investopedia ellen lindnerunderstanding transfer pricetransfer prices are used when individual entities of a larger multi entity firm are treated and measured as separately run entities it is common for multi entity corporations to be consolidated on a financial reporting basis however they may report each entity separately for tax purposes a transfer price arises for accounting purposes when related parties such as divisions within a company or a company and its subsidiary report their own profits when these related parties are required to transact with each other a transfer price is used to determine costs transfer prices generally do not differ much from the market price if the price does differ then one of the entities is at a disadvantage and would ultimately start buying from the market to get a better price for example assume entity a and entity b are two unique segments of company abc entity a builds and sells wheels and entity b assembles and sells bicycles entity a may also sell wheels to entity b through an intracompany transaction if entity a offers entity b a rate lower than market value entity b will have a lower cost of goods sold cogs and higher earnings than it otherwise would have however doing so would also hurt entity a s sales revenue if on the other hand entity a offers entity b a rate higher than market value then entity a would have higher sales revenue than it would have if it sold to an external customer entity b would have higher cogs and lower profits in either situation one entity benefits while the other is hurt by a transfer price that varies from market value regulations on transfer pricing ensure the fairness and accuracy of transfer pricing among related entities regulations enforce an arm s length transaction rule that states that companies must establish pricing based on similar transactions done between unrelated parties it is closely monitored within a company s financial reporting transfer pricing requires strict documentation that is included in the footnotes to the financial statements for review by auditors regulators and investors this documentation is closely scrutinized if inappropriately documented it can burden the company with added taxation or restatement fees these prices are closely checked for accuracy to ensure that profits are booked appropriately within arm s length pricing methods and associated taxes are paid accordingly 1transfer prices are used when divisions sell goods in intracompany transactions to divisions in other international jurisdictions a large part of international commerce is actually done within companies as opposed to between unrelated companies intercompany transfers done internationally have tax advantages which has led regulatory authorities to frown upon using transfer pricing for tax avoidance 