Though firms are greatly restricted by tax codes in the setting of transfer prices for tax purposes, some possibilities exist for flexibility in transfer pricing policies to reduce the tax burden, as long as the multinational corporation remains within the legal guidelines. Examples of these possibilities to minimize taxes include charging administrative fees, royalties, and service fees. Each of these alternatives are of course subject to the principle of being arms-length transactions and must be based on actual business activity.
If the transfer price is properly set, each division will be able to make decisions that are profit motivated, not governed from above.
The transfer price is the price used for internal transactions. This by itself does not enable the firm to determine the appropriate external price in each country in which it operates.
A well-devised transfer price enables the company to evaluate each of its divisions.
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