Transfer Pricing is the set of rules governing the prices charged on transactions between related entities of the same multinational group.
Transfer Pricing (TP) is the framework that determines how related companies in different countries price their intra-group transactions: management services, software licences, royalties, intra-group financing, cost-sharing arrangements, and the sale of goods. The objective from a tax-policy perspective is to prevent profit shifting from high-tax to low-tax jurisdictions through artificial pricing.
Most regimes follow the OECD Transfer Pricing Guidelines and require related-party transactions to be priced as if they were between independent parties (the arm's length principle). Acceptable methods include CUP (comparable uncontrolled price), resale price, cost plus, TNMM (Transactional Net Margin Method), and profit split. Each method requires comparables, functional analysis, and benchmarking studies.
Groups above revenue thresholds must prepare a three-tier documentation set: a Master File (group overview), a Local File (entity-level transactions), and a Country-by-Country Report (CbCR) for groups above EUR 750m revenue. Penalties for missing or weak documentation can be substantial, and adjustments can lead to economic double taxation if the other country does not provide a corresponding adjustment.
You will encounter transfer pricing the first time the parent charges a management fee to a subsidiary, when an IP-holding company licences software to operating entities, when intra-group loans are extended, and during tax audits where authorities will demand a Local File and benchmarking study within tight deadlines.
See what a company actually costs in year one, and how the jurisdictions compare on tax, capital and timeline.
