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What is transfer pricing?

Transfer pricing is the price at which an enterprise transfers either physical goods, intangible property or services, including financing arrangements, to associated enterprises. Generally, enterprises are associated if there is direct or indirect control by one of the enterprises of the other, or they are under common control. For these purposes, direct control means the ability to determine how the affairs of the company are conducted by virtue of the shareholding, voting rights or any powers within the articles of association or other document regulating the company or any other company. Determining whether indirect control exists depends on including rights and powers which are available in the future or which are held by other persons.

Transfer prices are important because, in large part, they determine the taxable profits of associated enterprises in different tax jurisdictions. Different tax authorities seek to ensure that the amount of taxable profit of an enterprise in their jurisdiction represents the appropriate amount of profit and that multinational enterprises do not transfer profits to low tax territories to