Which of the following statements is true regarding transfer pricing?

Question

Quizplus · Accepted Answer

The correct transfer price, according to the IRS guidelines, is an arm's-length price - the price that would prevail between unrelated firms in a market setting. This means that the transfer price should not be influenced by the relationship between the buyer and the seller, and it should reflect the fair market value of the product or service being transferred.

Option A is incorrect because most governments do not favor the use of transfer pricing as it can be used for tax evasion purposes.

Option C is partially correct, as the use of transfer pricing allows each subsidiary to be treated as a profit center, but it is not necessarily consistent with this policy.

Option D is incorrect because the opportunity for price manipulation is much greater with cost-based transfer pricing than with arm's-length pricing, as the former involves setting transfer prices based on the cost of production, rather than market rates.

Which of the Following Statements Is True Regarding Transfer Pricing