This question pertains to factors affecting the setting of transfer prices in an international setting.
Required: What are the primary factors affecting the setting of transfer prices between divisions of a company that operate in different countries.

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Feedback: There are two primary considerations affecting the setting of transfer prices in an international setting: inter-country differences in income tax rates,and the effect of import duties.
Differences in Income Tax Rates: Companies with divisions operating in different countries,and engaging in inter-divisional transfers of goods and services,can improve its worldwide after-tax earnings by appropriate tax planning.This assumes: (a)that the income-tax rates differ between countries (as we know they do),and (b)that the company as a whole does not violate,in setting its transfer prices,local income-tax laws or provisions in GATT (General Agreement on Tariffs and Trade).
Suppose a company based in,say,the U.S.has a division in,say,Asia.A U.S.division produces a subassembly,which is then transferred to the Asian division for assembly and sale of the final product.Assume that the income tax rate of the company's U.S.division is greater than the rate in the Asian division's country.In this scenario,corporate management has an incentive to set a low transfer price for the subassembly.This,in turn,will result in lower taxable income for the company's U.S.division,and higher taxable income for the Asian division.Under the assumption that the tax rate is lower for the Asian division,this "shifting of profits" (via the transfer pricing mechanism)has helped the company minimize its total (i.e. ,worldwide)income tax payments.Note,however,that tax laws vary among countries with regard to flexibility in setting a transfer price.
Import Duties: A second major consideration associated with setting international transfer prices has to do with import duties (or tariffs).These assessments are levied on an importer,and are generally based on the reported value of the goods being imported.Consider the preceding example of a company with divisions in both the U.S.and in Asia.If the Asian country imposes an import duty on goods transferred in from the U.S.division to the Asian division,then the company has an incentive to set a relatively low transfer price on any inter-divisional transfers of goods or services.By doing this,the company as a whole would minimize the duty levied and in so doing will help maximize overall profit of the company.Note that,as in the case above,countries sometimes pass laws that limit a multination company's flexibility in setting transfer prices for the purpose of minimizing import duties.

This Question Pertains to Factors Affecting the Setting of Transfer