🔁 Intercompany Transfer

When a product moves between two entities of the same company, say a factory in one country and a sales hub in another, the transaction still has to be priced. That's the intercompany transfer price, and tax authorities require it to be set as if the two sides were strangers. Set the markup below and watch the goods and the money move.

Scenario

In both cases Location B makes the goods and Location A is the selling entity. A drop shipment just skips A's warehouse — the goods go straight to the customer while the invoices still flow B → A → customer.

Pricing

What it costs B to make one unit.
Percent B adds to its cost (the cost-plus method). This is the price A pays B.
The market price the end customer pays A. Must be an arm's-length price to the third party.
Product (physical goods) Money (payment)

The numbers

Transfer price (A pays B)
–
B's margin on the sale
–
Customer pays A
–
A's margin on resale
–
Transfer price = C × (1 + markup) = – The cost-plus method: B's cost, grossed up by an arm's-length markup.

Does the pricing hold up?

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How the total profit (SP − C = –) splits between the two countries:

B
A
Location B (manufacturing) – Location A (sales) –
Raise the markup and profit slides from A's country toward B's. That shift is exactly why the markup has to be defensible — see the arm's-length principle.

What you're seeing

Location B manufactures the unit for – and invoices Location A at the transfer price. The goods move B → A; the money moves A → B. Nothing has been sold to an outside customer yet — A now holds the inventory on its books at the transfer price, which becomes A's cost when it eventually sells.

The customer orders from and pays Location A — that's where the sale is booked. But the goods never touch A's warehouse: Location B ships them straight to the customer (the drop shipment). Title and invoices still run B → A → customer, so A pays B the transfer price and keeps the difference as its distribution margin.

Try this: push the markup up. In a simple transfer you just move more profit into B. In a drop shipment, watch A's resale margin shrink — raise the markup far enough and A ends up buying for more than it sells, which no independent distributor would ever accept. That's the moment the pricing stops being arm's-length. Learn how these prices are actually set on the arm's-length principle page.