A transfer price is what one unit of a business charges another unit of the same business for a good or service.  The transfer price is usually close to the prevailing market rate when different divisions of the same business are evaluated separately for profit and loss. For instance, Big Corp Inc. has two divisions.  Division A produces car sound systems sold to the public.  Division B produces automobiles, which include a car sound system produced by Division A.  If A charges B a price lower than the market rate for the sound systems, then A’s sales, as measured in dollars, will be low.  On the other hand, a lower-than-market price helps B, because the lower price improves its cost of goods sold.   Tax authorities have strict rules regarding transfer pricing to prevent companies from shifting profits to tax haven countries.  Assume A and B are in different countries.  If Division A is in a low tax rate country and Division B is in a high tax rate country, Big Corp can reduce its overall tax burden by making A profitable and B unprofitable.  This is accomplished by having A charge B very high prices for the car sound systems.  A’s profits will be very high, but taxed at a low rate.  B’s will be taxed at a high rate, but the overcharges by A reduce profits, and thus lower its tax burden in its country.