What is Transfer Pricing?
How related companies price the goods, services, and IP they sell each other - under tax-authority scrutiny.
Transfer Pricing: definition
When entities of one group trade with each other - a parent selling components to a subsidiary, or licensing a brand - the price shifts profit between jurisdictions and therefore tax. To prevent artificial profit shifting, tax authorities require the arm-length principle: intercompany prices should match what unrelated parties would charge. Getting this wrong risks adjustments, double taxation, and penalties.
- Arm-length principle: related-party prices mirror open-market prices
- Common methods: comparable uncontrolled price, cost-plus, resale-minus, transactional net margin
- Documentation (master file, local file) supports the pricing to tax authorities
- Mispricing can trigger adjustments, double taxation, and penalties
How Fintra handles it
Fintra records intercompany transactions on one shared model, so the prices charged between your entities are visible and consistent rather than reconstructed at year-end. That gives your tax advisor a clean base for transfer-pricing documentation, and consolidation eliminates the intercompany margins so group financials are not overstated. Fintra supports the bookkeeping; it does not replace specialist transfer-pricing advice.
- Intercompany transactions tagged and priced consistently across entities
- Clean transaction detail to support transfer-pricing documentation
- Consolidation eliminates intercompany profit automatically
Worked example
Frequently asked questions
What is the arm-length principle?
The standard that transactions between related parties should be priced as if the parties were unrelated and dealing at market. It is the foundation of transfer-pricing rules worldwide and the benchmark tax authorities use to test whether profit has been shifted artificially.
Why does transfer pricing matter for taxes?
Because intercompany prices decide how much profit lands in each jurisdiction, they directly affect where tax is paid. Authorities scrutinize transfer pricing to stop groups from moving profit to low-tax locations. Poor documentation can lead to adjustments and double taxation.
Do small businesses need transfer pricing?
Any business with related entities that transact across tax jurisdictions faces transfer-pricing rules, not just multinationals. Even a US company with a foreign subsidiary should price intercompany dealings at arm length and keep documentation. The complexity scales with cross-border activity.
What transfer-pricing methods are accepted?
The OECD recognizes several: comparable uncontrolled price, resale price, cost-plus, transactional net margin, and profit split. The right method depends on the transaction and available comparables. A transfer-pricing specialist typically selects and documents the method.
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