Transfer Pricing

Transfer Pricing: The practice of setting prices for transactions within and between enterprises under common ownership or control.

Rules and Methods: Governing authorities establish protocols for calculating transfer prices to ensure fairness and compliance with tax regulations.

Transactions: These include sales of goods, provision of services, or transfer of intangible assets between related entities.

Enterprises: Parent companies, subsidiaries, and sister companies typically engage in these internal transactions.

Examples:

1. Sales of Goods: A parent company sells raw materials to its subsidiary.
2. Provision of Services: A subsidiary offers IT support to a related entity.
3. Transfer of Intangible Assets: A corporation licenses patents to a sister company.

Pricing Methods:

1. Comparable Uncontrolled Price (CUP): Uses prices of similar transactions between unrelated parties.
2. Resale Price Method: Based on the resale margin of the buyer in comparable transactions.
3. Cost Plus Method: Adds a standard mark-up to the cost incurred by the supplier.
4. Transactional Net Margin Method (TNMM): Applies net profit margins from comparable entities to the controlled transaction.
5. Profit Split Method: Divides profits based on the functions, assets, and risks of the related entities.

Key Information: Accurate transfer pricing ensures compliance, minimizes tax liability, and avoids double taxation.

Importance: Transfer pricing directly impacts fiscal policies and international trade dynamics.