Transfer pricing is an accounting and taxation practice that allows companies to determine the price that one division charges another division for goods and services provided. It is a mechanism for determining arms length pricing in related-party transactions, often in the context of cross-border related-party transactions. Transfer pricing is used to reduce the overall tax burden of the parent company by charging a higher price to divisions in high-tax countries, while charging a lower price for divisions in low-tax countries.
Transfer pricing is a legal technique used by large businesses to move profits. It is a set of substantive and administrative regulatory requirements imposed by governments on certain taxpayers. The practice extends to cross-border transactions as well as domestic ones. Transfer pricing can also be applied to intellectual property such as research, patents, and royalties.
The Organization for Economic Cooperation and Development (OECD) maintains its own guidelines related to transfer pricing. The U.S. transfer pricing regulations under ยง482 seek to ensure that appropriate amounts of income of a multinational enterprise are subject to U.S. taxation. The regulations aim to prevent profit shifting to lower tax jurisdictions and avoid international double taxation.
In summary, transfer pricing is a practice that allows companies to determine the price that one division charges another division for goods and services provided. It is used to reduce the overall tax burden of the parent company and can be applied to cross-border transactions as well as domestic ones. The OECD and the U.S. have their own guidelines related to transfer pricing to prevent profit shifting to lower tax jurisdictions and avoid international double taxation.
