Transfer pricing and the arm's-length principle, explained

Once a company operates through entities in more than one country, the prices they charge each other stop being an internal detail and become a tax question. That is transfer pricing.

1. What transfer pricing is

Transfer pricing is how related companies price transactions between themselves — services, goods, loans, or the use of intellectual property. Because those prices move profit between jurisdictions, tax authorities regulate them.

2. The arm's-length principle

The governing rule is that intercompany transactions should be priced as if the parties were independent. If a parent charges a subsidiary for management services, the charge should reflect what an unrelated provider would command for comparable services.

3. Documentation and benchmarking

Groups are typically expected to keep documentation — often a master file describing the group and a local file for each entity — showing how prices were set and benchmarked against comparable independent transactions. This is your defence if a tax authority reviews the arrangement.

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4. Why it matters early

Setting intercompany terms correctly from the start is far cheaper than an adjustment later, which can bring double taxation and penalties. Build the policy as you set up the second entity, not after the first audit.

Official references

• OECD: Transfer pricing
• IRS: International businesses

Important: This is general educational information, not legal, tax, accounting or exchange-control advice. Rules, rates and thresholds change and depend on your circumstances — confirm the current position with a qualified professional before acting.