Explain transfer pricing.

Answers will vary. One of the most significant ways a corporation can navigate the world of international tax in order to protect its profits is transfer pricing. Transfer pricing occurs when two parts of the same multinational corporation, often the parent company and a subsidiary in another country, engage in trade with one other. It can increase a company's profits by allowing the firm to earn profits in locations with lower tax rates. For example, a Japanese-based subsidiary of Toyota Motor Company buys some parts from a U.S.-based subsidiary. If the Japanese subsidiary pays a higher price for the parts from the United States than it would at home, the U.S. subsidiary will realize a higher profit at that stage of production-and the profit will be taxed at the lower U.S. corporate tax rate.
Transfer pricing can be applied to transactions relating to nearly any good or service, including raw materials, royalties for the use of copyrighted material or intellectual property, component parts, interest on loans, finished goods, and even fees.
The section "Transfer Pricing" on page 378 explains transfer pricing. Students can use this section to make their own interpretation and answer this question.