Transfer pricing remains a significant global concern for businesses across the globe. It pertains to regulated transactions that occur between affiliated entities, whether they are within the same group or have a direct or indirect control relationship, including control over the board of directors.

The concept of transfer pricing revolves around establishing the appropriate prices for transactions conducted between affiliated companies. These transactions must adhere to the arm’s length principle, meaning that the prices charged in related party transactions should be similar to those charged in transactions with third parties under similar circumstances.

Transfer pricing refers to the methods used to determine the price of goods or services traded between related companies or enterprises. It plays a crucial role in improving pricing, increasing efficiency, and simplifying accounting processes.

Additionally, transfer pricing allows for cost savings by streamlining processes and methods, reducing the need for excessive manpower. It also focuses on strategizing business operations and achieving higher profitability.

To understand transfer pricing, it is important to consider the costs incurred by a business, such as transportation, packing, freight, insurance, and applicable taxes or customs charges.

Typically, transfer pricing arrangements are made between related companies, such as holding and subsidiary companies. These arrangements specify the transfer price for the sale or purchase of goods between these entities.

These arrangements can involve two or more subsidiaries of a parent company or different companies within a group. For example, a parent company may manufacture cars while its wholly-owned subsidiaries produce components like brake linings. Transfer pricing helps determine the pricing of these components between the parent company and its subsidiaries.

Transfer pricing ensures that subsidiaries can maintain a market for their manufactured goods with steady margins. It also facilitates a continuous supply of raw materials or components to the parent company, ensuring uninterrupted production. The prices set for transferring goods are generally close to the fair market price for such goods.

Since transfer pricing involves related enterprises, it is important to avoid selling goods below or above the market price of either entity or the group as a whole. Selling goods at unfair prices can lead to an uneven distribution of profits among different entities.