Transfer pricing

Tax.

An area of taxation which examines the prices paid between related parties, usually companies.

Transfer pricing tax rules are designed to prevent related parties from shifting taxable profits between each other in such a way as to avoid tax.

The most important transfer pricing rule is that all transactions between related parties must be at 'arm's length' prices.

If the transfer pricing tax rules did not exist, a parent company could - for example - overcharge its overseas subsidiaries for goods or services.

This would - in this example - reduce the taxable profits of the overseas subsidiaries, the tax liabilities to the overseas tax authorities, and the total tax liabilities of the group, were it not for tax transfer pricing adjustments.

But the tax transfer pricing adjustments in the overseas tax assessments will prevent any tax avoidance in this case by adding back to overseas taxable profits the amounts of any overcharges, effectively restating the taxable profits as if arm's length prices had been charged.

See also

• Arm’s length principle
• Internal trading
• Thin capitalisation

Other links

Transfer pricing and treasury operations - EACT / ACT guidance note, 2009

Treasury and transfer pricing, Will Spinney, ACT 2009