WHAT IS TRANSFER PRICING?
Transfer pricing is a normal everyday part of business whenever two companies owned by the same group, or that are otherwise linked, have to buy or sell something between themselves.
When you sell something to yourself, the price is pretty unimportant and you might as well “sell” it for free. But when you sell something to yourself across a national border, the price you choose determines whether your profit falls on one side of the border or the other. When an economy is dominated by multinational firms, transfer pricing can make or break that country’s government and economy.
In principle, the bad kind of transfer pricing is called transfer “mispricing” or “abusive” transfer pricing. That’s when you sell things to yourself at more or less than the fair price to shift profit from one unit to another.
You can use a variety of instruments from selling actual physical things to providing services, charging for the use of IP, or making intercompany loans with suspiciously high interest rates.
The general rule is that the price you charge yourself has to be the same as that you would charge a normal customer “at arm’s length”.