Transfer pricing refers to the practice of determining the value of goods, services, or intellectual property that is transferred between companies that are part of the same multinational group, in different tax jurisdictions.
Multinational companies often use transfer pricing to allocate income and expenses among different subsidiaries in different countries, in order to minimize their global tax liability. This is typically done by setting the price of transactions between different parts of the company at a level that maximizes tax efficiency, rather than at a market rate.
For example, a company may sell a product from one subsidiary to another subsidiary at a price that is lower than the market rate, in order to shift profits to the subsidiary in a lower-tax country. Similarly, a company may charge a high price for the use of intellectual property, such as trademarks or patents, in a higher-tax country, in order to reduce its tax liability there.
However, transfer pricing can be a contentious issue for tax authorities, particularly if they suspect that a company is manipulating prices in order to avoid paying taxes. To prevent this, many countries have established transfer pricing rules and regulations that require companies to use a market-based pricing method, and to provide documentation to support their pricing decisions.
Overall, transfer pricing is an important tool for multinational companies to manage their global tax liability, but it can also be a complex and potentially controversial area of taxation.
