A transfer price is the price set between companies in the same group when exchanging goods and services or sharing resources.

The term covers all aspects of inter-company pricing arrangements, including transfers of tangible and intangible property, services, loans and other financial transactions.

Without regulation, it would be possible for groups to artificially reduce taxable profits by manipulating internal transfer prices, so governments require prices to be at arm’s length, and that this is documented.

The OECD Guidelines on transfer pricing are followed by most countries and outline a number of methods under which transfer prices can be set on an arm’s length basis.

Conformity with the “arm’s length principle” is generally judged by comparing the price of a transaction between related parties with that in similar transactions between unrelated parties.

Failure to comply with transfer pricing legislation can result in protracted disputes with authorities, double taxation (where the same income is taxed in two or more countries) and tax geared penalties.

With tax authorities across the world increasing their focus on transfer pricing, it is becoming more important than ever for businesses to ensure they have a suitable transfer pricing methodology and supporting documentation.