Lesson 42 - Advanced Accounting Course

Lesson 42: Transfer Pricing and Its Role in International Taxation

💡 What Is Transfer Pricing?

Transfer pricing refers to the price charged for goods, services, or intellectual property when transactions occur between divisions or subsidiaries of the same multinational company (often located in different countries).

🧾 It helps determine how much profit is reported in each country.

🏢 Real-Life Example

A U.S.-based company sells software to its subsidiary in Ireland:

• 💻 Software development cost = $100
  
  

• 🇮🇪 Irish subsidiary pays $300
  
  

• 💰 Profit = $200
  
  

But where is that profit taxed? In the U.S.? In Ireland? 🤔
That’s what transfer pricing rules aim to regulate.

⚖️ Why Transfer Pricing Matters in Taxation

Multinational companies often operate in high-tax and low-tax countries. Without rules, they might:

• Shift profits to low-tax countries 📉
  
  

• Lower their overall tax bill 💸
  
  

• Create unfair competition 🌍
  
  

📌 Tax authorities want to ensure fair taxation and prevent “base erosion and profit shifting” (BEPS).

🌍 Key Role in International Taxation

🔑 The Arm’s Length Principle

📏 The Arm’s Length Principle is the core of transfer pricing regulation:

“Treat intra-group transactions as if they were between unrelated parties.”

👥 You must set prices the same way independent companies would.

📊 Transfer Pricing Methods

📘 Example: CUP Method

• Unrelated company sells widgets for $12
  
  

• Subsidiary sells the same to another at $10
  
  

⛔ Not arm’s length → may need to adjust the price for tax purposes.

🧾 Transfer Pricing Documentation

Companies must prepare documents to show:

• 💰 Method used
  
  

• 📄 Reasoning
  
  

• 📊 Benchmarking data
  
  

• 🌍 Compliance with local and international rules
  
  

📌 Without documentation → Penalties, audits, adjustments!

🌐 OECD Guidelines and BEPS

Most countries follow OECD Transfer Pricing Guidelines, which promote:

• Arm’s length principle 📏
  
  

• Transparency 📑
  
  

• Fair tax allocation between countries ⚖️
  
  

🌍 BEPS = Base Erosion and Profit Shifting, a global initiative to stop profit manipulation through tax planning.

🚦 Risk Areas

🧠 Recap