TRANSFER PRICING IN THEORY AND PRACTICE

Outline the complexity of intercompany transactions and the tax implications of these transactions. Intercompany transactions are transactions between a parent and a subsidiary or between two subsidiaries within the same multinational corporation or enterprise. These transactions are executed between related parties. As such, these transactions are not subject to the same competitive pressures on pricing as transactions between unrelated parties. Because of this lack of competitive force to determine a market price, tax authorities are concerned that the price might be set in a manner that is inconsistent with a market price and that may shift taxable income out of their tax jurisdiction. The generally agreed principle among tax authorities is that the price in the related party transaction should be similar to the price that was charged or would have been charged between unrelated parties in comparable transactions. Elective.