Definition of Transfer Pricing
Transfer prices are the prices for the purchase or sale of goods and services agreed between Related Parties, which should be at values as if they were bought or sold to companies that are not related.
The objective of the Transfer Pricing is based on the principle of free competition also known as “Arm Length” and the purpose is that the Related Parties tax the payment of income tax in the country where such profit is generated and avoid the transfer of profits to countries where there are regimes of lower or no taxation and this is achieved by avoiding the manipulation of prices.
International Transfer Pricing
For such purpose, the Tax Administrations of most of the countries in the world have a Transfer Pricing legislation, where through the application of a comparability analysis applying a work methodology, it is verified that the operations between Related Parties have been at market values, as if they had been sold or bought to a company without any kind of link, otherwise an additional income tax rate would have to be paid.
What is Transfer Pricing about?
All this is based on a Transfer Pricing Technical Study where a functional and economic analysis of the company and the transactions with its Related Parties is established, where comparable are sought from companies that have similar characteristics to the economic activity of the company subject to the Study and where finally, as a result of the use of one of the six methods (methods to determine transfer pricings) of valuation, an interquartile range will be established originating a minimum and a maximum value of comparable values acceptable for tax purposes, where the transaction made with its Related Party should fit, otherwise the company would have to make an adjustment in its taxable income and pay the income tax surcharge.