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Transfer Pricing Basics

Understand transfer pricing basics for intercompany transactions — arm’s length principle, methods, and documentation needs — to manage cross-border tax risk. Use when setting intercompany pricing, expanding internationally, or preparing TP documentation with advisors.

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Transfer Pricing Basics

Overview

Transfer pricing governs how related entities price intercompany transactions. Tax authorities scrutinize whether prices reflect arm’s length dealing.

When to Use

  • Cross-border intercompany services, goods, or IP
  • New entity or principal structure setup
  • TP policy and documentation cycles
  • Audit inquiries on intercompany margins

Core Concepts

  • Arm’s length principle
  • Common methods (CUP, resale minus, cost plus, TNMM, profit split)
  • Functional analysis (functions, assets, risks)
  • Documentation and contemporaneous support

Principles

  • Pricing should follow substance of where value is created
  • Paper without operational reality is fragile
  • Specialist advice is essential for material structures
  • Consistency year to year reduces challenge risk

Verification

  • Intercompany transactions are inventoried
  • Policy exists for material flows
  • Documentation timeline is owned

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