What is Transfer Pricing?

Transfer pricing is the set of rules that determines the prices at which related companies within a multinational group charge each other for goods, services, intangibles and financing, requiring those prices to reflect what independent parties would have agreed (the 'arm's length principle').

Without transfer-pricing rules, multinationals could shift profit at will to low-tax jurisdictions by overcharging or undercharging intercompany transactions. The OECD Transfer Pricing Guidelines (latest update 2022) prescribe five accepted methods: comparable uncontrolled price, resale price, cost plus, transactional net margin (TNMM) and profit split.

Documentation is mandatory: master file describing the group's global business and TP policy, local file for each country detailing local-specific transactions, and (for groups above EUR 750 million revenue) country-by-country reporting (CbCR) filed with the parent country and shared with other tax authorities.

Disputes are frequent and expensive. Advance Pricing Agreements (APAs) — bilateral or unilateral rulings agreed with tax authorities — can lock in TP methodologies for 3–5 years and prevent later challenges. Penalties for non-arm's-length pricing typically include the additional tax plus 10–40% surcharge.

Example

A German parent company sells finished goods to its Italian subsidiary at EUR 80 per unit. A TNMM analysis benchmarks the Italian distributor's operating margin against independent distributors at 3.5%. The price adjusts to ensure the Italian subsidiary earns within the 3.0–4.0% range, avoiding profit shifting.

Related terms

Corporate Tax

Corporate tax is the tax a company pays on its profits — revenues minus deductible business expenses, depreciation, interest and (often) loss carry-forwards — with European rates ranging from 9% in Hungary to 30% in some German municipalities.

Tax Haven

A tax haven is a jurisdiction that offers very low or zero taxation, strict financial secrecy and minimal substance requirements, used legally for international structuring and illegally for tax evasion and money laundering.

Tax Treaty

A tax treaty (double-taxation agreement) is a bilateral or multilateral agreement between countries that allocates taxing rights over cross-border income and provides procedures to relieve double taxation, exchange information and resolve disputes.

Double Taxation

Double taxation occurs when the same income or capital is taxed twice — most commonly by two different countries claiming taxing rights — and is mitigated through bilateral tax treaties and domestic relief mechanisms.

Frequently asked questions

Does TP only apply to large companies?+

No — any cross-border related-party transaction is subject to arm's length rules, but documentation requirements scale with size.

What is the arm's length principle?+

Prices between related parties must match those that independent parties would have agreed in comparable circumstances.

What is CbCR?+

Country-by-Country Reporting: required for MNE groups with consolidated revenue ≥ EUR 750 million; lists revenue, profit and tax per country.