Q. Aim of a transfer pricing system?
Aim of a transfer pricing system could be tax avoidance Different countries have varying tax rates. A multi-national company can set up subsidiaries in different countries to take advantage of these tax rates through transfer pricing to reduce their overall tax charge. Lower taxation can be achieved by charging a high transfer price when the seller pays less tax than the buyer, (the sellers profit would be higher) or a low transfer price if the buyer pays less tax than the seller (the buyers profit would be higher).
Some multi-national companies use transfer pricing to reduce their overall tax charge but national tax authorities have taken steps to discourage the manipulation of transfer prices. National tax authorities have the powers to thoroughly investigate accounts to ensure that a fair or 'arm's length' market price has been used internally and that profits have not been manipulated by transfer pricing to reduce subsidiary tax payments. Fines and penalties can be imposed on organisations who deliberately try to manipulate profits by the improper use of transfer pricing.