What is Transfer Pricing in taxation?

Transfer pricing is the price being set for intercompany transactions. For example, an organization may consist of several companies that sell similar items all over the world, but are owned the same person/people. Company A may be making and selling part Y in the US, while company B is making part Z in Europe. Both companies manufacture and sell products to the same market. Company A decides it wants to sell part Z in the US. Since they are not the manufacturing entity, Company A can only make a small margin on the sale, so based upon what they are selling it for they calculate a transfer price that they will pay Company B for that part. This is done so that the bulk of the profit resides with Company B as the manufacturer, and thus the bulk of the taxes on that profit will go the taxing agency for the country Company B is located in.