What is the goal of transfer pricing?

Understanding Transfer Pricing

Transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. It’s a significant issue in international taxation.

The Goal of Transfer Pricing

The primary goal is to achieve arm’s length pricing. This means that the price charged by one related party to another for goods, services, or use of property must be the same as it would be if the parties were not related. This prevents profit shifting and ensures that each country gets its fair share of tax revenue.

Transfer Pricing Methods

There are several methods used to achieve the goal of transfer pricing, including:

  1. Comparable Uncontrolled Price (CUP) Method
  2. Resale Price Method (RPM)
  3. Cost Plus Method
  4. Profit Split Method
  5. Transactional Net Margin Method (TNMM)

Each method has its own advantages and disadvantages, and the choice of method depends on the specific circumstances of the transaction.

In conclusion, the goal of transfer pricing is to ensure that transactions between related parties are priced as if they were between independent parties, preventing profit shifting and ensuring fair taxation. Understanding and complying with transfer pricing rules is crucial for multinational companies to avoid tax disputes and penalties.

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by mojodigital