Large firms often consist of several divisions that cooperate with each other. Transfer pricing is the price set for products and services exchanged between different business units of the same organization. At the same time, units can be located in various countries where there are different tax laws. As a result, the transfer price and its manipulation are often used to reduce the taxes paid. Despite the risks that manipulation carries, an adequately chosen pricing strategy can bring many benefits.
Branches of the company that shares products and services can be located in the same and different countries. Prices should strive for a market level to maintain both sides of the deal equal and contribute to product stability. However, due to globalization, tax issues are becoming more complicated, there is a misunderstanding of which party should withdraw the tax, and firms use this fact.
For example, high-priced goods transferred from high-taxed countries are sold in low-taxed countries, and profit margins increase. The possibility of tax cuts has drawn the attention of tax officials to firms that use transfer pricing. Companies can suffer severe losses due to fines for adjusting their transfer pricing policy without complying with the established rules. It is, therefore, essential to address the issue with appropriate attention.
Shareholders usually support large organizations with branches in various countries. If, thanks to transfer pricing, it is possible to increase profit and the company’s welfare, shareholders’ profit also grows. However, branches can also have several shareholders with different company shares.
The percentage of their shares should be considered when deciding which of the shareholders can be associates and eligible to establish transfer pricing. For example, in Tanzania, this percentage was 50 and then reduced to 25%. Thus, applying transfer pricing to companies with several shareholders to establish their involvement in the issue, it is necessary to consider the percentage of shares of the stake.