Transfer pricing governs how related entities price intercompany transactions. Missteps can trigger audits, penalties, and double taxation. This article explains the arm's‑length principle, documentation requirements, and planning strategies.
1. Arm’s‑Length Principle & OECD Guidelines
Tax authorities expect related‑party prices to mimic those that unrelated parties would charge. Follow OECD guidelines: functional analysis, comparability study, and selection of the most reliable method (CUP, TNMM, profit split, etc.).
2. Documentation Checklist
- Master File – Company‑wide overview of global operations and transfer‑pricing policies.
- Local File – Transaction‑level details for each jurisdiction.
- Country‑by‑Country Report – Revenue, profit, and tax paid per country.
3. Risk Mitigation Strategies
Conduct advance pricing agreements (APAs), maintain contemporaneous documentation, and perform periodic benchmarking studies to defend pricing positions.