Transfer pricing

Transfer pricing is the pricing of transactions between related entities, such as divisions or subsidiaries of the same corporation. Tax rules often require these prices to reflect terms independent entities would have agreed.

Withholding tax: A tax collected at source from certain payments, including some cross-border royalties, interest, and service fees. The structure and pricing of related-party payments can affect withholding-tax liabilities.
Resale price method: A transfer-pricing method that starts with a reseller's sale price to independent customers and subtracts an appropriate gross margin. It is an alternative to cost-plus when a related distributor resells purchased goods.
Double taxation: The taxation of the same income or economic activity by more than one tax jurisdiction or authority. Two countries may adjust the same transaction differently, taxing overlapping profits.
League of Nations: An international organization founded after World War I to promote cooperation and prevent conflict. Its early work on international taxation helped shape principles later used in transfer-pricing rules.
Customs valuation: The process of determining the value of imported goods for calculating customs duties. A declared related-party price may be scrutinized for both customs duties and income-tax purposes.
Transactional net margin method: A transfer-pricing method that compares a party's net profit margin with margins earned in comparable uncontrolled transactions. Unlike direct price methods, it tests net profitability rather than the transaction price itself.
Corresponding adjustment: A tax adjustment by one jurisdiction that offsets another jurisdiction's transfer-pricing adjustment to relieve double taxation. It can reduce overlapping tax when authorities agree that a primary adjustment is justified.
OECD Transfer Pricing Guidelines: Guidance from the Organisation for Economic Co-operation and Development on applying the arm's length principle to multinational transactions. They set out widely influential methods and documentation approaches for cross-border pricing.
Management accounting: The use of financial and operational information to support internal planning, control, and decision-making. Internal transfer prices influence divisional costs, reported performance, and resource choices.
Profit split method: A transfer-pricing method that divides combined profits from controlled transactions among related parties according to their contributions. It contrasts with one-sided methods by allocating profit across multiple contributing entities.

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