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While corporations have many legitimate economic reasons for intra-company transfer prices that appear to differ from prices they may charge externally, tax authorities are concerned with transfer pricing, for among other reasons, because it is a potentially good source of additional revenue.
Transfer prices aim to create an internal marketplace for transfers of products and services between an organization's profit center managers.
It belongs to the story that estimates suggest that almost half of world trade is actually trade between entities of MNEs, so reliable transfer prices for this trade is essential for the working of the international tax regime for companies.
Transfer prices directly affect the allocation of groupwide taxable income across national tax jurisdictions.
The effect of more and more countries introducing transfer pricing rules has been that, particularly European, countries seem to be not only reviewing the transfer prices achieved by their own tax residents, but also reviewing the pricing, ie the results achieved, by the foreign party to a cross-border connected party transaction.
International transfer prices create opportunities for multinational firms to shift profits between divisions located in high-tax countries to those in low-tax countries.
Instead of taking the company's own internal prices set on the transaction, which might not always reflect market rates, government agencies issue guidelines that are used to calculate transfer prices.
The most common practice of mentioned tax leakage is through manipulation with transfer prices.
A firm with operations in more than one country must be cautious when setting transfer prices for goods or services sold between divisions.
The CPM determines transfer prices by comparing entity-level operating results with those of uncontrolled taxpayers engaged in similar activities under similar circumstances.
Transfer prices are prices at which a company transfers physical goods, intangible assets or when it provides services to associated companies.