transfer pricing
The prices charged for transactions between related entities within the same corporate group, which can be used to shift profits to lower-tax jurisdictions.
Example
“The multinational used transfer pricing to charge its Irish subsidiary below-market royalties, shifting profits to a low-tax jurisdiction.”
Memory Tip
TRANSFER PRICING = prices between related companies. Multinationals use this to shift profits to low-tax countries.
Why It Matters
Transfer pricing affects how much tax large corporations pay globally, which influences government tax revenues and can impact consumer prices. Understanding this concept helps individuals recognize how multinational companies structure their finances and why tax fairness remains a contentious policy issue.
Common Misconception
Many people believe transfer pricing is always illegal or fraudulent, but it is actually a standard and legal accounting practice. The key distinction is that transfer prices must be set at arm length, meaning at prices comparable to what unrelated parties would charge each other.
In Practice
A tech company with a U.S. parent and Irish subsidiary might charge the Irish entity 50 million dollars for intellectual property licenses, shifting profits to Ireland where tax rates are lower. The U.S. parent gets a deduction for the 50 million dollar expense, reducing U.S. taxes owed, while the Irish subsidiary reports lower profits after paying the license fee, demonstrating how transfer pricing can legally minimize overall group tax burden.
Etymology
TRANSFER (moving goods/services between entities) PRICING (setting prices). Setting PRICES for internal TRANSFERS.
Common Misspellings
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Related Terms
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See Also
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