Transfer pricing is an accounting procedure that reflects the amount that one division within the company charges another division for the goods or services that are provided.

Transfer pricing allows for the establishment of prices for the goods and services exchanged between subsidiaries, affiliates, or commonly controlled companies that are part of the same larger enterprise. Transfer pricing can lead to tax savings for corporations, though tax authorities may contest their claims.

Key takeaways

  • Transfer pricing accounting occurs when goods or services are exchanged between divisions of the same company.
  • A transfer price is based on market prices in charging another division, subsidiary, or holding company for services rendered.
  • Companies use transfer pricing to reduce the overall tax burden of the parent company.
  • Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.
  • The IRS states that transfer pricing should be the same between intercompany transactions as it would have been had the company done the transaction outside the company.

Why should you outsource transfer pricing?

  1. If you’re not sure about the regulations and rules in relation to transfer pricing as well as the requirements for preparing the document describing transfer pricing it is recommended that you hire professionals and accounting experts to manage this crucial task for your business.
  2. The document for transfer pricing must be prepared in advance so that you’re ready to submit it with your taxes on income. If not, it may negatively influence your compliance with law and also the overall operation of the company.
  3. It is typical for companies to be uncertain regarding the best way to calculate transfer prices for their particular type of business. If you pick the wrong method, everything you do thereafter will be in error or could be in conflict with the law and guidelines.
  4. Although some tax agents are familiar with transfer pricing, they lack access to the information needed to complete the process through economic analysis.
  5. In certain situations, multinational corporations (MNEs) may claim to have full documentation on transfer price from their parent company. However, branches of the company may also be able to meet this requirement. Because of the global importance of transfer pricing There have been a variety of changes to the regulations. Consequently, it’s crucial to stay up to date on the current norms and regulations to construct trustworthy transfer price paperwork.

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