Transfer pricing is the pricing of goods, services and intangibles between related parties. The arm’s length principle should be adopted for transfer pricing between related parties. Taxpayers should prepare and keep contemporaneous transfer pricing documentation to show that their related transactions are conducted at arm’s length.
Transfer pricing occurs as multinationals look to establish their related parties pricing agreements across the world.
Related parties are parties who control one another, or who are under the common control of another party, whether directly or indirectly. They include branches and head offices.
Related parties must deal with each other at arm’s length.
Purpose of preparing and maintaining transfer pricing documentation
Taxpayers should prepare and keep contemporaneous transfer pricing documentation.
Transfer pricing documentation refers to the records kept by taxpayers to show that their related party transactions are conducted at arm’s length.
The preparation and maintenance of transfer pricing documentation will facilitate reviews by tax authorities and therefore help resolve any transfer pricing issues that may arise.
Without transfer pricing documentation to show that the transfer prices are at arm’s length, taxpayers may not be able to deal with transfer pricing enforcement actions by tax authorities and double taxation arising from those actions.