Definition
Transfer Pricing
Transfer pricing rules govern how transactions between related entities, often across borders, must be priced to reflect fair market value for tax purposes.
Multinational groups transact internally — selling goods, services or intangibles between subsidiaries. Without rules, they could shift profits to low-tax jurisdictions by manipulating these internal prices. Transfer pricing law requires such transactions to be priced as if between unrelated parties, the arm's length principle.
Indian rules require extensive documentation and benchmarking, and disputes over what is arm's length are among the largest in international tax. Mechanisms like Advance Pricing Agreements and safe harbours exist to give taxpayers certainty and reduce litigation.
Related terms
- DTAA (Double Taxation Avoidance)A Double Taxation Avoidance Agreement is a treaty between two countries that prevents the same income from being taxed twice and allocates taxing rights between them.
- Arm's Length PrincipleThe arm's length principle requires that transactions between related parties be priced as if they were between independent, unrelated parties.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.