Transfer pricing is the price at which goods, services, or intellectual property rights are exchanged between entities within the same multinational group located in different countries. These prices are used to allocate income and costs among subsidiaries and directly affect each entity’s tax liability.
Transfer pricing is governed by international tax rules, in particular the OECD principles, as follows:
- Prevent manipulation that artificially shifts profits to low-tax jurisdictions.
- Ensure that intra-group transactions are conducted at market value, as if they were between independent companies (the arm’s-length principle).
In practice, transfer pricing concerns:
- the sale of goods or raw materials between subsidiaries
- the invoicing of internal services (management, IT, marketing)
- the granting of intellectual property licenses.
In summary, transfer pricing is an accounting and tax tool that enables international groups to allocate financial results fairly among their subsidiaries while complying with the tax obligations of the countries concerned.