First of all, what is transfer pricing?
Transfer Pricing is the price to which one headquarter transfers products or services to its associated enterprises located in different countries. Transfer prices are applied to multinational groups to evaluate the performance of their different members (branches and subsidiaries).
When branches or subsidiaries follow the same commercial strategy, operations can be planned in order to locate the income source in the country that has the lowest tax pressure, avoiding that the biggest benefits are generated in countries with the highest taxation. To avoid this practice, countries tax authorities agreed on the Arm’s Length Principle, which states “equal treatment to the multinational companies as well as to the independent ones”. Transfer pricing fights dumping by allowing local tax authorities to adjust transfer prices.
The advantages of transfer pricing
Transfer pricing agreements allow to:
– Save costs;
– Simplify the internal accounting system.
Indeed, if the mother company purchases supplies from its abroad located branch it would be better for it to purchase at the same price as if it was buying from an independent supplier. This means the company is fixing a market price for its products, not below and not above the market threshold.
Applying the transfer pricing principles means to apply the open market principles.
The topic should be anyway treated with consideration, as every country applies different rules. Is for that reason that the opinion of an expert should always be heard.