Transfer Pricing
The prices set for transactions between related entities of the same multinational corporation across different tax jurisdictions.
What is Transfer Pricing?
Transfer pricing refers to the prices charged for goods, services, intellectual property, and financing transactions between affiliated entities within the same corporate group — such as a parent company and its foreign subsidiaries. Tax authorities require these prices to be set at arm's length, meaning they should reflect what independent parties would pay in a comparable transaction. Multinationals have incentives to manipulate transfer prices to shift profits from high-tax to low-tax jurisdictions, reducing their overall tax burden. The OECD's Transfer Pricing Guidelines and BEPS (Base Erosion and Profit Shifting) project provide frameworks for countries to enforce arm's length standards and prevent abusive profit shifting.
Example
A U.S. pharmaceutical company might transfer patents on blockbuster drugs to an Irish subsidiary at a low valuation, then have the Irish entity license those patents back to operating subsidiaries worldwide at high royalty rates. The royalties are deductible in high-tax countries and taxed at Ireland's 12.5% corporate rate — substantially below the U.S. rate of 21%. This structure reduces the multinational's global effective tax rate.