Abstract
This chapter discusses transfer pricing by multinational manufacturing firms. The fact that a transaction involving a transfer or sale of goods takes place within a firm, regardless of whether or not the firm spans different countries and the firm is free within broad limits to assign whatever price it likes to those goods, means that the traditional theory of pricing in competitive, oligopolistic, or monopolistic markets ceases to apply to the process of transfer pricing. The essential difference is simply that in transactions on the open market, or between unrelated firms, the buyers and sellers are trying to maximize their profits at each other's expense, while in an intra-firm transaction, the price is merely an accounting device and the two parties are trying to maximize joint profits. It is possible that the accounting price may approximate the arm's length price of the goods, but there is no presumption that this should be so and any other price is equally plausible, and the conditions will determine whether the actual transfer price will deviate from the arm's length price.
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