what is transfer price

what is transfer price

1 year ago 42
Nature

Transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. It is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. Transfer prices may be used in transactions between a company and its subsidiaries, or between divisions of the same company in different countries.

Key features of transfer pricing include:

  • Arms Length Transaction Rule: This rule requires pricing to be based on similar transactions done between unrelated parties.

  • Market Value: Transfer prices are generally based on market prices in charging another division, subsidiary, or holding company for services rendered.

  • Tax Savings: Companies use transfer pricing to reduce the overall tax burden of the parent company. Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.

Multinational companies can manipulate transfer prices in order to shift profits to low tax regions. To remedy this, regulations enforce an arms length transaction rule that requires pricing to be based on similar transactions done between unrelated parties. Effective but legal transfer pricing takes advantage of different tax regimes in different countries by raising transfer prices for goods and services produced in countries with lower tax rates.

Transfer pricing can lead to tax savings for corporations, though tax authorities may contest their claims. It is a concept applicable to controlled transactions which are considered to be between related parties and should observe the arms length principle.

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