Transfer Pricing Definition

Transfer Pricing, meaning the “setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property (including intangible property)”
In simple words, transfer pricing can be defined as “the price at which divisions of a company transact with each other”. Transfer pricing happens whenever two companies that are part of the same multinational group trade with each other. One party transfers to another goods or services, for a price. That price is known as "transfer price". It thus refers to the value attached to transfers of goods, services and technology between related entities and also to the value attached to transfers between unrelated parties which are controlled by a common entity.

This is known as “arms-length” trading , because it is the product of genuine negotiation in a market. This arm’s length price is usually considered to be acceptable for tax purposes. But when two related companies trade with each other, they may wish to artificially distort the price at which the trade is recorded, to minimise the overall tax bill. This might, for example, help it record as much of its profit as possible in a tax haven with low or zero taxes.
Tax law starts from the assumption that the application of the arm’s length standard will reduce the interference of tax effects with bona fide business decisions taken by the corporate management. The “arm’s‐length” standard provides the right starting point for the analysis.
The theory underlying the arm’s length price suggests that transactions governed by arm’s length prices do not only indicate the “right” profit for the particular group company but also the “right” split of revenue for the involved countries.
2.1. COURT PRACTICES OF VARIOUS STATES IN APPLYING ARM LENGTH’S

vs. HMRC decided by Special Commissioners in which a UK company selling goods to customers entertained an insurance contract for warranties with an affiliate company located in the Isle of Man . It was disputed whether the premiums paid to the captive insurance company were in line with the arm’s length principle. The Special Commissioners found that while the premiums passed the arm’s length test, it was evident that the parent company had offered to the captive insurance company a “business facility” which it would not have found outside the group. Therefore, taking into account the “bargaining power” of the parent company, the insurance premiums paid to the capital insurer had to be reduced by an offsetting consideration for the “business opportunity” as