Performance Management · Divisional performance and transfer pricing

Transfer Pricing in Multinationals for ACCA PM

Updated 11 October 2026 · Fact-checked

International transfer pricing is the price one division charges another when they sit in different countries. Multinationals may set it to cut total tax, duties and exchange-control losses. To solve questions, compare each country's tax rate, tariffs and restrictions, then check the effect on group profit and on divisional motivation.

Understand Transfer Pricing in Multinationals

A transfer price is the internal price charged when one division of a group supplies goods or services to another. Within one country it mainly affects divisional profit and motivation. Across borders it also changes where the group's profit is reported, and so where tax is paid.

The tax idea is simple. If the selling division is in a low-tax country and the buying division is in a high-tax country, a high transfer price moves profit to the low-tax seller. The buyer's cost rises, so its taxable profit falls. Group profit before tax is unchanged, but group tax falls, so after-tax profit rises. The reverse applies if the seller is in the high-tax country.

There are limits. Tax authorities expect transfer prices to be close to an arm's length price, meaning what unrelated parties would charge. Many countries have rules and penalties against artificial pricing. Heavy manipulation can lead to adjustments, fines and reputational harm.

Other factors also matter. Import tariffs (customs duties) are often charged on the transfer price, so a low price cuts duty. Exchange controls may limit how much profit can be sent out of a country, and a high transfer price can be a way to extract funds. Exchange rate movements and subsidies or quotas can also affect the choice.

The behavioural side matters too. A price chosen to save tax may make one division look weak and demotivate its managers. One answer is dual pricing: the seller is credited at one price (for example market price) and the buyer charged another (for example marginal cost). Divisional results look good, but group profit is not overstated only if the two sets of books are reconciled at group level. It can also be complex and may be questioned by tax authorities.

Key rules to remember

Tax effect of a transfer price: Group tax = (Seller profit × seller tax rate) + (Buyer profit × buyer tax rate); Recalculate both divisions' profit at each transfer price. Total profit before tax stays the same.
Direction of profit shifting: Seller tax rate < buyer tax rate → set a high transfer price. Seller tax rate > buyer tax rate → set a low transfer price.; The price should push profit to the lower-tax country. This is before tariffs and other constraints. Apply it only if tax is the key driver.
Net saving with tariffs: Net benefit = Tax saved − extra import duty after tax relief. Extra duty after tax relief = change in price × tariff rate × (1 − buyer tax rate) if duty is deductible; otherwise change in price × tariff rate.; A higher price saves tax but raises duty if the duty is charged on the transfer price. Check whether the duty is deductible for tax.
Dual pricing: Seller credited at one price; buyer charged at another; difference = group-level adjustment; Not a numerical formula. Remember the adjustment is eliminated on consolidation.

How to solve Transfer Pricing in Multinationals questions

Use this order for any question on international transfer pricing, whether it is numerical or discussion.

1List the facts: countries, divisions, tax rates, tariff rates, exchange controls and any market price or cost data.
2Identify the direction of the seller and buyer, and which has the lower tax rate.
3Work out profit and tax for each division at each proposed transfer price.
4Add in tariffs or duty on the transfer price, and any restrictions on remitting profit.
5Compare total group after-tax profit for each option and state which is best.
6Comment on the risks: arm's length rules, tax authority challenge, penalties and reputation.
7Comment on behaviour: goal congruence, divisional autonomy, motivation and performance measurement.
8Give a clear recommendation, noting any alternative such as dual pricing or a negotiated price.

Quickest way: Rate comparison shortcut

When to use it: Use this for Section A and OT case questions where you only need the best direction or the net saving.

Find the tax rates of seller and buyer. If the seller's rate is lower than the buyer's, push the price up. If the seller's rate is higher, push the price down.
Calculate the change in price × the difference in tax rates for the tax saving.
Subtract any extra duty after tax relief: change in price × tariff rate × (1 − buyer tax rate) if duty is deductible. If it is not deductible, subtract the full duty: change in price × tariff rate.
If the net is positive, the change is worthwhile. Otherwise keep the lower price.
Rule out options that breach exchange controls or arm's length rules if the question mentions them.

Common mistakes in Transfer Pricing in Multinationals

Setting a high transfer price whenever profit is wanted in the seller's country, without checking the tax rates.
Students memorise 'high price' as the answer.
Fix: Always compare the two rates first. The price should push profit to the lower-tax country.
Ignoring tariffs charged on the transfer price.
Tax is the first thing students think of.
Fix: Subtract duty from the tax saving and test each price. A tariff may reverse the answer.
Saying group profit before tax changes with the transfer price.
Divisional profits change, so students assume the total does.
Fix: Total pre-tax profit is the same. Only tax, duty and cash movements change the group result.
Recommending tax-driven pricing without mentioning legal limits.
Students focus only on the numbers.
Fix: Add that tax authorities expect arm's length prices and may adjust profits and impose penalties.
Describing dual pricing as always beneficial for the group.
It sounds like it satisfies both divisions.
Fix: Note the drawbacks: complex records, a group-level adjustment, possible tax challenge, and it may hide inefficiency or reduce the incentive to control costs.
Ignoring managers' motivation and autonomy.
The question seems purely numerical.
Fix: Add a short point on goal congruence and how a dictated price can distort divisional performance measures.

Worked examples

Example 1

Division A in Country X (tax rate 20%) supplies 10,000 units to Division B in Country Y (tax rate 40%). Cost to A is $30 per unit. B sells the units externally for $80 each after incurring no other costs. No tariffs apply. Compare transfer prices of $40 and $60 per unit on group after-tax profit.

Show the solution

Group pre-tax profit = 10,000 × ($80 − $30) = $500,000 at either price.
At $40: A profit = 10,000 × ($40 − $30) = $100,000; tax at 20% = $20,000.
At $40: B profit = 10,000 × ($80 − $40) = $400,000; tax at 40% = $160,000.
Group tax at $40 = $20,000 + $160,000 = $180,000.
At $60: A profit = 10,000 × ($60 − $30) = $300,000; tax at 20% = $60,000.
At $60: B profit = 10,000 × ($80 − $60) = $200,000; tax at 40% = $80,000.
Group tax at $60 = $60,000 + $80,000 = $140,000.
Group after-tax profit at $40 = $500,000 − $180,000 = $320,000; at $60 = $500,000 − $140,000 = $360,000.

Answer: The $60 price gives group after-tax profit of $360,000 against $320,000 at $40, a gain of $40,000. Profit moves to the lower-tax Country X. The group should check that $60 is acceptable as an arm's length price.

Example 2

Using the same data, Country Y charges an import duty of 10% on the transfer price. Compare $40 and $60 per unit on group after-tax profit, treating duty as a deductible cost for B. Then comment briefly.

Show the solution

Duty at $40 = 10% × $40 × 10,000 = $40,000. Duty at $60 = 10% × $60 × 10,000 = $60,000.
At $40: A profit $100,000, tax $20,000. B profit = $400,000 − $40,000 = $360,000; tax at 40% = $144,000.
Group tax at $40 = $164,000. Group after-tax profit = $500,000 − $40,000 duty − $164,000 = $296,000.
At $60: A profit $300,000, tax $60,000. B profit = $200,000 − $60,000 = $140,000; tax at 40% = $56,000.
Group tax at $60 = $116,000. Group after-tax profit = $500,000 − $60,000 duty − $116,000 = $324,000.
Compare: $324,000 at $60 against $296,000 at $40.
Check the logic: each $1 rise in price moves $1 of profit from 40% tax to 20% tax, saving $0.20. Duty rises by $0.10, but it is deductible at 40%, so the net cost is $0.06. Net gain is $0.14 per unit. For a $20 rise: 10,000 × $20 × $0.14 = $28,000, which agrees with $324,000 − $296,000.

Answer: $60 still gives the higher group after-tax profit: $324,000 against $296,000, a gain of $28,000. The tariff cuts the benefit, but does not reverse it. The group should still consider arm's length rules and the effect on Division B's reported performance.

Exam tips

Show a small table-style layout in your working: seller profit, buyer profit, tax and duty at each price, then the group total. It earns marks and avoids slips.
In OT questions, read whether duty is deductible for tax. Do not assume it either way if the question states it.
In written answers, give both sides: financial benefit and the risks of tax authority challenge, plus behavioural effects. One-sided answers lose marks.
If the question mentions exchange controls, say how the transfer price can help extract funds, and add that governments may respond with rules or penalties.
Link dual pricing to goal congruence and performance measurement, and state clearly who is credited and charged at which price.

Practice questions from Divisional performance and transfer pricing

Transfer Pricing in Multinationals in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Transfer Pricing in Multinationals: frequently asked questions

How do multinationals use transfer pricing to reduce tax?

They set higher prices when the seller is in a lower-tax country and lower prices when the seller is in a higher-tax country. This moves profit to where it is taxed less. Tax authorities limit this through arm's length rules, so the practice carries risk.

What is dual pricing in transfer pricing?

Dual pricing credits the selling division at one price, often market price, and charges the buying division another, often marginal cost. Both divisions can see favourable results. The difference must be removed in group accounts, and the system can be complex.

Why do import tariffs matter for transfer prices?

Customs duty is often charged on the value of goods, which is the transfer price. A higher price raises the duty. You must set the duty cost against any tax saving before deciding on the price.

What is the arm's length principle?

It means related companies should price transactions as unrelated parties would. Tax authorities use it to test whether profits have been shifted artificially. If the price is not accepted, profits can be adjusted and penalties may follow.