Transfer Pricing

The American Marketing Association defines transfer pricing as “the pricing of goods and services that are sold to controlled entities of the same organization, for example, movements of goods and services within a multinational or global corporation.” Transfer pricing is an intra firm transaction that affects costs and profitability at the subsidiary level and overall after-tax profitability for the firm at the corporate level. How the firm accounts for its various intrafirm transactions is therefore of interest to host governments, who would understandably want to investigate any suspicions of tax evasion through transfer pricing practices.

Host governments are naturally concerned to ensure that multinationals are not using creative accounting to avoid paying taxes. As a result, host governments may impose restrictions and enact laws that curtail ...