Transfer Pricing TP
Stands for: Transfer Pricing
The set of rules governing the prices charged on transactions between related entities of the same multinational group.
Definition
What it is
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.
The arm's length principle
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.
Documentation under BEPS Action 13
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.
When you'll encounter it
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.
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FAQ
Does transfer pricing apply to small groups?
Yes. There is no general size exemption from the arm's length principle, although formal documentation requirements often kick in only above turnover or transaction-volume thresholds.
What happens if my pricing is wrong?
The tax authority can adjust profits upward, charge additional tax, interest, and penalties, and the other country may refuse a corresponding adjustment, leading to double taxation.
Are intra-group loans covered?
Yes. Interest rates on intra-group loans must reflect arm's length terms, supported by a credit-rating analysis and a benchmark study.
References
- OECD Transfer Pricing Guidelines for Multinational Enterprises https://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm
- IRS - Transfer Pricing https://www.irs.gov/businesses/international-businesses/transfer-pricing