Transfer Price
Candlefocus EditorTransfer prices that differ from market value will be advantageous for one entity, while lowering the profits of the other entity. This can be done in various ways, such as charging below-market prices for goods or services or giving a discount to the buying entity. When two related entities are in separate countries, companies often have an incentive to transfer profits to low-tax jurisdictions by settling sales at artificially low prices. This can also be used to maintain low levels of taxation on sales revenues and profits.
To ensure that transfer prices are reasonable, fair, and in accordance with international tax principles, certain countries enforce an arm's length transaction rule. This rule mandates that pricing must be based on similar transactions done between unrelated third parties, or upon prices that are publicly available. This requirement is meant to prevent a company from artificially manipulating sale prices simply to shift profits between its entities.
In order for transfer pricing to be accurate and legally compliant, businesses must also adhere to specific documentation guidelines. Transfer pricing regulations can vary between countries, and businesses should carefully analyze local and international requirements for their industry to ensure compliance.
Transfer pricing is an important aspect of financial management, and multinational companies must take care to ensure that their transfer pricing strategy is reasonable, fair and compliant with international tax regulations. Failure to do so can lead to penalties, fines, or other adverse consequences.