TransferPricing
Transfer pricing
Transfer pricing — the tax rules for transactions between related companies, requiring market prices so that profit is not shifted to low-tax countries.
- What it is
- Transfer pricing — the rules on prices in transactions between related companies
- Requirement
- Prices between related parties must be at market level (arm’s length)
- Why
- So that profit is not shifted to low-tax countries through prices
- Who it matters to
- International groups of companies
- How to use it
- Justify market pricing with documentation
In plain words
Transfer pricing is the set of rules for taxing transactions between related companies in the same group: when, for example, a subsidiary sells goods or services to the parent or another company within the holding structure. The key requirement is that prices in such intra-group transactions must be at market level, that is, the same as between independent parties (the arm’s length principle).
Why states need this: by manipulating internal prices, a group could artificially move profit from a high-tax country to a low-tax one — by inflating or understating the cost of internal supplies. Transfer pricing rules prevent this: they require profit to be taxed where it is actually generated, and prices to be justified and at market level.
For international business this is an important area of compliance: companies are obliged to justify the prices of intra-group transactions and keep special documentation (transfer pricing documentation). Breaches lead to additional tax assessments and penalties. When building holding and international structures, we take transfer pricing requirements into account so that the structure is not only efficient but also protected against claims by the tax authorities.
Where transfer pricing matters
What matters about transfer pricing
- Prices in group transactions
- Between related parties
- Tax rules
- Market prices
- The arm’s length principle
- As between independent parties
- Profit repatriation
- Price manipulation
- Tax avoidance
- Justify the prices
- Keep documentation
- Otherwise additional assessments
How to comply with the rules
- 01Identify transactions within the group
- 02Determine the market level of prices
- 03Prepare the documentation
- 04Justify it to the tax authority
- 05A protected structure
What you need to know
- Transfer pricing is the rules on prices in group transactions
- Prices between related parties must be at market level
- The arm’s length principle
- It prevents profit being shifted to low-tax countries
- It requires documentation; breaches lead to additional assessments
Common mistakes
- Setting non-market prices in group transactions
- Not keeping transfer pricing documentation
- Artificially moving profit through prices
- Ignoring the requirements when building a holding structure
- Underestimating the risk of additional assessments and penalties
What this means for a BRIDGES client
When building your international and holding structures, we take the transfer pricing rules into account: we help set market prices in intra-group transactions and prepare the supporting documentation. That way the structure remains efficient and protected against additional assessments and claims by the tax authorities.
Frequently asked questions
01 /What is transfer pricing?
The rules for taxing transactions between related companies in a group. They require prices in intra-group transactions to be at market level, as between independent parties.
02 /What is the arm’s length principle?
The requirement that prices between related companies correspond to market prices, that is, those independent parties would agree.
03 /Why are these rules needed?
So that groups do not move profit to low-tax countries by manipulating internal prices. Profit must be taxed where it is actually generated.
04 /Who does this matter to?
International groups of companies with intra-group transactions: supplies of goods and services, royalties, financing between related firms.
05 /What are the consequences of a breach?
Additional tax assessments and penalties if the tax authority considers the prices non-market and suspects profit shifting. That is why prices are justified with documentation.
06 /What is transfer pricing documentation?
Special documentation justifying that intra-group prices are at market level. Keeping it is mandatory in many countries; we help prepare it.
See also
Read next
This material has undergone editorial review by BRIDGES.
Building an international group?
We will take the transfer pricing rules into account and prepare the documentation — so that the structure is protected from additional assessments.