Transfer pricing terminology explained

The transfer price is the original price that is charged between transactions related to entities that are included as a part of the multinational enterprise (MNE) group.

It is a technique that is used by multinational companies to take the profits out of countries where they operate and into tax havens. 

It is used to set prices for the transactions between the subsidiaries or divisions of a company to help manage costs and regulate revenues smoothly. 

The tax price can be different, which depends on the country. The transfer price is used in the Act of section 92CE and explained in section 92CB of the Income Tax Act. Under section 92CA, the transfer pricing is used as part of the term transfer pricing officer. 

How does transfer pricing work?

The transfer pricing works to set the prices for the transaction between the subsidiaries or divisions under a common ownership, and applies to both domestic and cross-border exchanges. It can also be applied to intellectual property, like royalties, patents, and research.

MNCs can use transfer pricing legally for the earnings of subsidiaries. However, they may get a taxable income, which can result in a reduction to their overall taxes. It also helps them to have a Tax liability at a low cost. 

What is the purpose of transfer pricing? 

The actual purpose of the transfer pricing is to distribute the earnings to the organizations and to reduce the tax burdens of the multinational companies.