transferpricing

Transfer pricing is the setting of prices for goods, services, intangibles, and financial transactions between affiliated entities within a multinational enterprise. These intra-group prices determine how much of a transaction’s value is allocated to each jurisdiction and entity for tax and accounting purposes. Common intra-group transactions include the sale of goods, provision of services, licensing of intellectual property, and intercompany financing.

Many tax authorities apply the arm’s length principle, which requires related-party prices to resemble the prices that would have been charged between independent parties under similar conditions. To determine arm’s length prices, several methods are used, including the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method, and the profit split method. The choice of method depends on data availability and the nature of the transaction. Advanced pricing agreements can set an agreed method for future years and reduce uncertainty.

Because transfer pricing affects taxable profits, compliance involves documentation such as master files, local files, and, in some jurisdictions, country-by-country reporting. Tax authorities may adjust prices and assess penalties for non-compliance or for aggressive tax planning. Disputes can be addressed through mutual agreement procedures or advance pricing agreements to mitigate double taxation.

Global initiatives, notably the OECD BEPS project, have heightened attention to transfer pricing to curb base erosion and profit shifting. Rules continue to evolve around intangible assets, digital business models, and documentation requirements. Companies must conduct economic analyses, assess risk, and maintain robust documentation to minimize disputes and align with tax authorities’ expectations.