Transfer pricing – a key element of international integration and who is bound by it?

What are transfer prices?

Transfer pricing is the price at which companies within the same business system (e.g. affiliates, subsidiaries, branches) sell goods, services or intellectual property to each other. It is an important concept in international business because it has a direct impact on tax liabilities and therefore on companies' profits.

The Importance of Transfer Pricing

Because multinational companies operate in different countries, they can optimize their tax liabilities through transfer pricing. This means they can shift profits to countries with more favorable tax policies, which can lead to a reduction in the tax base in countries with higher tax rates. For this reason, transfer pricing is often monitored by tax authorities around the world to prevent possible tax avoidance.

OECD rules and arm's length principle

The Organisation for Economic Co-operation and Development (OECD) has developed transfer pricing guidelines based on the arm's length principle. This means that transfer prices must correspond to the market prices that would be set by independent enterprises under the same or similar circumstances.

transfer pricing methods

Companies use different methods to determine transfer prices:

Comparable Uncontrolled Price (CUP): A comparison of transaction prices with those of unrelated companies.

Resale price method: An analysis of the margin a seller makes when reselling goods.

Cost plus method: Pricing based on cost plus a certain margin.

Profit sharing method: The distribution of total profit among affiliated companies according to their contribution.

Transactional Net Margin Method (TNMM): An analysis of a company's net profit compared to comparable companies in the market.

regulation and supervision

Due to possible tax abuse cases, many countries require detailed documentation of transfer prices and proof that companies operate in line with market practice. Violations can lead to high fines and adjustments to the tax base. In addition, companies must establish a transfer pricing policy that sets out the strategies and methods for determining prices between associated companies and ensures compliance with legal requirements.

Diploma

Transfer pricing is a central element of international business as it influences companies' tax policies and financial strategies. To avoid tax risks and ensure transparency and regulatory compliance, companies must manage their transfer pricing carefully and in accordance with OECD rules and local laws.