What is transfer pricing?

Transfer pricing refers specifically to the pricing of intercompany transactions among related entities, such as subsidiaries or divisions of a multinational corporation. This concept is crucial because it can significantly influence a company's tax obligations and financial reporting. When companies trade products, services, or intangible assets internally, they must determine the price at which these transactions occur — this is where transfer pricing comes into play.

Properly establishing transfer prices is essential for compliance with tax regulations in the various jurisdictions where the companies operate. Tax authorities often scrutinize these prices to ensure that they reflect market conditions and are not manipulated to shift profits to lower-tax regions, thereby avoiding taxes.

This definition and function of transfer pricing contrast sharply with the other options. For example, valuing stock options relates to employee compensation and financial statements but does not involve the pricing of transactions within the company. Tax evasion through inflated costs implies illegal activities, which is not the intent of transfer pricing regulations, as they aim for fairness and adherence to market values. Determining the fair market value of assets pertains to asset valuations but does not specifically address the transfer of goods or services between related parties. Thus, the focus of transfer pricing is clearly on intercompany transactions, making the selected answer accurate.