Final answer:
Transfer pricing is an intra-group exchange transaction used by divisions of the same company often in different countries to set prices for their transactions, impacting tax liabilities and profit allocation.
Step-by-step explanation:
Transfer pricing refers to the setting of prices for transactions between different divisions within the same company, especially when these divisions are located in different countries. The type of exchange transaction that transfer pricing represents is 1) Intra-group transaction. This is because the transaction occurs between members or divisions of the same corporate group, and not with external entities.
The concept of transfer pricing is crucial for multinational companies as it impacts how profits are allocated among the different countries in which they operate, which in turn affects the tax liabilities in different jurisdictions. It is also an area of interest for tax authorities who seek to ensure that transfer prices are set at an arm's length, meaning they reflect market value as if the transactions were between unrelated parties.