What is transfer pricing?


Quick Answer

Transfer pricing occurs when two companies under the same umbrella organization trade good and services between each other and establish an acceptable price for the transaction. It is estimated that 60 to 70 percent of international trade involves transfer pricing between two companies from the same corporate group.

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Full Answer

Transfer pricing is not illegal so long as the price negotiated is similar to market rates. The opposite of transfer pricing is transfer mispricing, which is considered illegal as of 2014. Transfer mispricing occurs when transactions take place between two unrelated parties. This activity is known to cost governments worldwide billions of dollars in lost tax revenue. Developing countries are most at risk of transfer mispricing, as multinationals can take advantage of a wide network of business partners to avoid paying tax.

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