Primer On Transfer Pricing Audits

Transfer pricing attracts a lot of attention from tax authorities, generally because large amounts are often involved and most countries are concerned with protecting their own tax base. Transfer pricing refers to the manner in which prices for goods and services are determined among entities within the same corporate group and in different countries. In general, where a corporate group has one entity in a country acquiring goods and services (e.g., raw materials, inventory, royalties for the use of IP, or finance-related services) from another entity in a different country, the price they agree to pay for those goods and services (the "transfer price") affects how much income is realized (and how much tax is paid) in each country. Because different countries have different tax rates, there is an incentive to have an entity in the higher-tax country incur more expenses (i.e., pay higher transfer prices for goods and services received) and minimize income (i.e., charge