What is Transfer Pricing?
Transfer pricing is an international tax area that covers the methods of properly accounting for transactions between entities located in different countries that are under common control – such as subsidiaries and different company divisions of a larger parent company. These transactions can include transfers of tangible goods, services, intellectual property or financing transactions.
The strategic use of transfer pricing enables related companies to manage and reduce the overall tax burden of the parent company.
However, transactions that increase profits in one country and decrease profits in another are highly scrutinized and are required to meet the “arm’s length standard” which means prices comparable to the prices that would be charged between two independent companies.
Laws and regulation require taxpayers to maintain documentation and justification of intercompany transfer pricing policies for tax authorities in each country that it has a presence.