Transfer price is the price at which transactions are carried out between companies part of the same group (i.e. related companies or related parties)
The transactions carried out between related companies must comply with the arm’s length principle, which is at the heart of any transfer pricing analysis. This means that the prices applied in transactions between companies from the same group must be the same with the prices charged by independent companies in comparable economic conditions. Otherwise, profits will not be correctly reflected in the jurisdiction of each related company involved in the transaction.
Transfer pricing is a system of laws and practices used by countries to ensure that goods, services, intellectual property and resources transferred or shared between affiliated companies are appropriately priced based on market conditions. This is important as transfer pricing may inflate profits in low tax jurisdictions and decrease profits in high tax countries – the so called “base erosion and profit shifting” concept.
Transfer Pricing Methods
The first category consists of: the comparable uncontrolled price method (“CUP” method), cost plus method and resale price method. The second category consists of: the transactional net margin method (“TNMM”) and the transactional profit split method.