The overall objective in the determination of a transfer price is to:

• A. Maximize the profits of the selling division only
• B. Minimize tax liabilities in all jurisdictions
• C. Promote goal congruence and optimize the overall profitability of the company
• D. Ensure that all intercompany transactions are eliminated from consolidated financial statements

Answer: (C)

Verified step by step guidance

1. Understand the concept of transfer pricing: Transfer pricing refers to the pricing of goods, services, or intangible assets transferred between divisions or subsidiaries within the same company. It is crucial for ensuring fair allocation of resources and profits.
2. Identify the primary objective of transfer pricing: The goal is to promote goal congruence, which means aligning the interests of individual divisions with the overall objectives of the company, and optimizing the overall profitability of the organization.
3. Consider the implications of transfer pricing: Transfer pricing should not solely focus on maximizing the profits of one division or minimizing tax liabilities. Instead, it should ensure that the company as a whole benefits and complies with legal and regulatory requirements.
4. Understand the role of intercompany transactions: Transfer pricing must account for intercompany transactions in a way that ensures they are properly documented and eliminated during the preparation of consolidated financial statements.
5. Evaluate the importance of compliance and fairness: Transfer pricing policies should be designed to comply with tax laws and regulations in all jurisdictions while maintaining fairness and transparency to avoid disputes or penalties.