The sales company buys products from the production company (price A) and then sells them to customers (price B). Price a is the internal transfer price of the company.

The trading conditions between an enterprise and its affiliated enterprises (controlled) will be different from those between unrelated parties (uncontrolled/independent transactions), so as to transfer profits through related transactions (controlled transactions). For multinational enterprises (domestic enterprises), in principle, there is generally no problem if the related party transaction pricing does not reduce domestic taxes.

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The role of transfer pricing

1, transfer pricing has the effect of reducing taxable income, thus reducing enterprise income to the level of use tax rate, because most countries now adopt an excessive progressive system when collecting enterprise tax rate, which means that the more enterprise income, the higher the tax rate, but transfer pricing can reduce enterprise taxable income through price transfer.

2. Transfer pricing can also reduce the ad valorem tax. When one or more parties are engaged in import and export trade, they can reduce the paid-in customs duties by increasing or decreasing, dividing warehouses, and in batches.

3. The biggest function of transfer pricing is to detect whether the transactions between enterprises conform to the principle of fair trade. Whether you are a taxpayer or a staff member of the tax authorities, you should choose a reasonable transfer pricing method when formulating and evaluating transaction pricing.

Baidu encyclopedia-transfer pricing

Baidu Encyclopedia-Transfer Pricing Method