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What Are Transfer Pricing?

What is Transfer Pricing?

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Transfer pricing is an accounting practice that consists of the purchase and sale price of goods and/or services provided between companies.

In turn, it allows the pricing of goods and services exchanged between subsidiaries, affiliates, or commonly controlled companies that are part of the same larger enterprise. Likewise, multinational corporations (MNC) legally use this method for allocating earnings among their various subsidiary and affiliate companies members of the parent organization.

What is the purpose of Transfer Pricing?

The Transfer Pricing purpose is based on the “Arm’s Length” principle, which makes the Related Parties pay income tax in the country where the profit is generated and avoids the transfer of profits to countries of lower or zero taxation regimes by avoiding price manipulation. Thus, Transfer Pricing can result in tax savings for companies, although tax authorities may contest their claims.

Likewise, the transfer pricing mechanism is a way that companies can shift tax liabilities to low-cost tax jurisdictions.

Therefore, the Tax Administrations of most countries have a Transfer Pricing legislation that analyzes the comparability through a working methodology that checks whether transactions between Related Parties are at market value as if they had been sold or purchased from an unrelated company to avoid paying an additional income tax rate.

What is the analysis of the technical Transfer Pricing study based on?

It is based on a functional and economic analysis of the company and the transactions with its Related Parties under a Technical Transfer Pricing Study, which seeks comparables of companies similar to the economic activity of the company subject to the Study, whose final product will determine the transfer pricing that will originate a minimum and maximum value of comparable values acceptable for tax purposes through an interquartile range where the transaction with its Related Party should fit. Otherwise, the company would have to adjust its taxable income and pay the surtax on income tax.

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