Transfer pricing
(TP).
1.
Tax
An area of taxation which examines the prices paid between related parties, usually companies in the same group.
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 widespread and important tax transfer pricing rule is that all transactions between related parties must be at 'arm's length' prices. The most common application of the rule relates to transactions between group companies which are resident in different countries for tax purposes.
Example
If the tax transfer pricing rules did not exist, a parent company could - for example - achieve a tax advantage by overcharging some of its foreign-resident subsidiaries for goods or services.
In the absence of the tax transfer pricing rules this overcharging would - in this example - reduce the taxable profits of the foreign-resident subsidiaries and the local tax liabilities to the foreign country's tax authorities.
Assuming the domestic tax rate paid by the parent were lower than the foreign country's tax rate, the total tax liabilities of the group would also be reduced, were it not for tax transfer pricing adjustments in the foreign country.
However, the tax transfer pricing adjustments in the local foreign country tax assessments would prevent any tax avoidance in this case, by adding back to the foreign country taxable profits the amounts of any overcharges, effectively restating the local taxable profits as if arm's length prices had been charged.
2.
'Transfer pricing' can also refer more broadly to the management and analysis of transfer prices, not only from a tax perspective.
See also
- Arm’s length principle
- Base erosion and profit shifting
- .CbC reporting page
- Funds transfer pricing
- Internal trading
- Thin capitalisation
- Related party
- Residence
- Transfer price
- Unrelated party
Other links
Transfer pricing and treasury operations - EACT / ACT guidance note, 2009
