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Profitability

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Profitability

The transfer price should be in line with the company’s profitability objective.  Since the two divisions belong to the same company the goal should maximize the profitability of the company and not the department. The two divisions should agree on the best price for the company. For example, the transfer price can only cover the production cost.

Taxation

A good and a proper transfer pricing is able to offset all the tax liability based on division with an equivalent on the other. The major objective of transfer pricing is aimed at maximizing the overall tax profits of the organization. Since the transaction is not controlled by the open market, it helps in improving the taxation options of the organization.

Goal Congruence

The earning of each division must be in line with the goals of the holding company. The increase in the subdivision profit margin should not affect the profitability of the company negatively. For example, charging high transfer prices may force the division to outsource the product from external sources hence reducing the sale volume of the parent company.

Reduction of Custom duty payments

Since the transfer price is between the two divisions belonging to the same parent organization, therefore it is important to reduce the customs duty payment, since it will help in the reduction of pricing which will allow the products to adapt to the market prices.

Attracting global market

The other objective of transfer price in to penetrate into the global market. For example, a company with a foreign subsidiary may transfer products to its foreign subsidiary at favorable prices.

 

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