What is meant by transfer pricing?

Transfer pricing refers to the pricing of goods and services exchanged between different divisions or subsidiaries of the same company. It is important in situations where transactions occur internally rather than in the open market. The price established for these internal transactions can impact financial reporting, tax obligations, and performance evaluations of the divisions involved.

In this context, the correct answer highlights that transfer pricing is specifically about how divisions within a company price the products or services they provide to one another. This concept is central to understanding how companies manage their internal financial practices and comply with regulatory requirements regarding intercompany transactions.

Transfer pricing can affect profit allocation among divisions and influence management decisions, making it a crucial aspect of corporate finance and accounting practices. This reflects its significance in not only ensuring compliance with tax laws but also in optimizing overall operational efficiency and strategic decision-making within a corporation.