Transfer pricing rules refer to the guidelines and regulations that govern how multinational companies price their internal transactions when goods or services are transferred between different entities within the same corporate group.
The purpose of transfer pricing rules is to ensure that these transactions are conducted at fair market value, so that profits are allocated appropriately among the different entities and countries involved. If transfer prices are set too high or too low, it can result in tax evasion, where profits are shifted to low-tax jurisdictions, or tax base erosion, where countries miss out on taxable profits.
Each country has its own transfer pricing rules, but they are often based on the principles set forth by the Organisation for Economic Co-operation and Development (OECD). The OECD Guidelines provide a framework for determining arm’s length prices, which are prices that would be agreed upon between unrelated parties in similar circumstances.
Transfer pricing rules typically require companies to maintain detailed documentation and records to support their pricing decisions. Tax authorities may audit these records to ensure compliance with the rules and may adjust the transfer prices if they are found to be inappropriate.
