How do governments apply transfer pricing rules?

Transfer pricing is a term used to describe the pricing of goods, services, and intangibles between related parties. It is a key component of international tax law in Maryland, as well as elsewhere in the world. Transfer pricing is the practice of setting prices of goods, services, and intangibles between related parties in different countries. By setting transfer prices, companies can have an effect on the amount of taxation they pay in each country. Governments use transfer pricing rules to prevent companies from artificially shifting their profits to lower-tax jurisdictions. Transfer pricing rules are used to prevent companies from artificially inflating or deflating the prices of transactions between related parties in order to pay less tax in one country than in another. Governments require companies to base their transfer pricing on the “arm’s length principle” - i.e. the prices and other terms of such transactions would be consistent with those which would exist between unrelated, independent parties. Governments utilize a variety of methods to enforce transfer pricing rules. These include establishing an “advance pricing agreement”, requiring companies to provide detailed documentation on their transfer pricing practices, conducting audits, and imposing penalties for non-compliance. Governments can also impose a “related-party transaction tax” in certain cases, to ensure that profits are taxed where they are economically earned. Overall, transfer pricing rules enable governments to protect the integrity of their domestic tax base, while ensuring that companies pay the correct amount of tax in each country. In Maryland, transfer pricing rules are necessary for companies conducting business both domestically and globally.

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How do governments apply transfer pricing rules?

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