Transfer pricing - Financial definition

Transfer pricing is a critical aspect of international taxation, involving the determination of prices for transactions between related entities within a multinational enterprise. It ensures that these intra-company transactions are conducted at arm's length, meaning they reflect market prices as if the transactions were between unrelated parties. Proper transfer pricing is essential to avoid tax evasion and profit shifting, as it impacts where profits are reported and taxes are paid.

Practical examples include setting prices for products sold between subsidiaries in different countries, allocating costs for shared services like R&D, and valuing intangible assets such as intellectual property. Regulatory frameworks like the OECD Transfer Pricing Guidelines provide standards and methods for establishing appropriate transfer prices to comply with tax laws and avoid double taxation.