What is Transfer Pricing?
Rules governing prices charged between related entities across borders, ensuring they reflect arm's-length market values.
Definition
Transfer pricing refers to the rules and methods for pricing transactions between related entities in different countries, such as a US parent company and its Canadian subsidiary. Tax authorities require these intercompany transactions to be at arm's-length prices—what unrelated parties would charge. Improper transfer pricing can shift profits to low-tax jurisdictions, triggering penalties and adjustments. Both the IRS and CRA actively enforce transfer pricing rules.
Who Needs to Know This?
US and Canadian businesses with related entities in both countries, multinational corporations, and small businesses with cross-border related-party transactions.
Key Deadline
Transfer pricing documentation must be maintained contemporaneously; reported with annual corporate returns
Potential Penalties
20-40% penalty on transfer pricing adjustments; potential double taxation if both countries disagree
Related Forms
Common Mistakes to Avoid
- 1Not maintaining contemporaneous transfer pricing documentation
- 2Using non-arm's-length prices for intercompany transactions
- 3Not understanding which transfer pricing method to apply
- 4Ignoring transfer pricing for services (not just goods)
Related Terms
Harsh Agarwal, EA · IRS Enrolled Agent
Reviewed for accuracy by Zenith Financial Advisors
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