What is Transfer Pricing?

Transfer pricing refers to the setting of prices for transactions between related parties, such as subsidiaries of a multinational corporation. These transactions can include the transfer of tangible goods, intangible property (like patents or trademarks), services, and loans. The main purpose of transfer pricing is to manage the allocation of profits and losses among different parts of the multinational enterprise, often with the objective of minimizing the overall tax burden. However, tax authorities scrutinize transfer pricing arrangements to ensure they adhere to the 'arm's length principle,' which requires that transactions between related parties are priced as if they were conducted between independent entities under comparable circumstances. Non-compliance can lead to significant tax penalties and adjustments.